Please ensure Javascript is enabled for purposes of website accessibility

It's Shocking to See These 2 Stock Market Darlings Falling Hard Thursday

By Dan Caplinger - Feb 25, 2021 at 12:39PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite solid earnings from both of these companies, their shares suffered.

What the stock market gives, the stock market takes away. That's been the message on Wall Street this week: Volatility has moved major stock indexes in both directions as market participants try to parse all the factors affecting their assessment of current economic and business conditions. At 11:30 a.m. EST, the Dow Jones Industrial Average (^DJI 1.76%) was down 205 points to 31,757, falling back from its all-time high on Wednesday. The S&P 500 (^GSPC 2.47%) had dropped 40 points to 3,885, and the Nasdaq Composite (^IXIC 3.33%) posted a decline of 218 points to 13,380.

Many of the stocks that fell on Thursday have had their share prices get ahead of their fundamentals. But it was surprising to see that even some companies announcing extremely strong financial results gave up considerable ground in the morning market session. Both Innovative Industrial Properties (IIPR 2.37%) and Domino's Pizza (DPZ 2.90%) have ridden long-term trends to huge success, but they both fell back after releasing their latest numbers.

Pizza cut into quarters.

Image source: Getty Images.

Feeling low

Shares of Innovative Industrial Properties plunged 17%. The marijuana-focused real estate investment trust released its fourth-quarter financials late Wednesday, and despite record results, investors weren't satisfied with what they saw.

On its face, the financial report from Innovative Industrial looked extremely strong. Total revenue soared 110% year over year to $37.1 million, closing a year in which total rents and tenant reimbursements jumped more than 160%. Adjusted funds from operations (FFO), the preferred measure of profitability for REITs, climbed 127% for the quarter from the same period in 2019.

However, it's important to understand that much of Innovative Industrial's growth has come from acquisitions that were financed in large part by stock issuance. The number of diluted shares outstanding more than doubled in the past year. That means that on a per-share basis, adjusted FFO rose less than 10% to $1.29 per share for the quarter.

That deceleration in share count-adjusted growth was troubling to those who've seen the cannabis REIT as one of the most consistent growth stocks in the marijuana sector. Yet it's still surprising to see such a big drop when the company's fundamental business operations are continuing to expand using the same business model Innovative Industrial has always used.

Cooling off

Domino's Pizza has been one of the hottest restaurant chains of the past decade. The extended rise of its stock price hit a roadblock on Thursday morning with the release of fourth-quarter financial results from the pizza specialist.

Like Innovative Industrial's, Domino's financial results looked solid. Global retail sales jumped 12% in the fourth quarter after currency and calendar impacts are adjusted for. U.S. same-store sales were higher by 11.2%, closing a strong year of 11.5% comps growth domestically. Earnings per share rose 23% for the quarter and nearly 30% in fiscal 2020 as a whole. Domino's also continued to expand its store network, adding nearly 400 locations in the fourth quarter alone to bring its total new restaurants to 624 for 2020.

Yet investors had expected still better performance on the bottom line, and they seem worried that the impact of the pandemic could start to reverse itself as the coronavirus vaccine is distributed. Competition from dine-in restaurants could hit Domino's as 2021 progresses, once local laws permit and people feel more comfortable going out.

Think long-term

The ebbs and flows of quarterly performance can be confusing for investors, leading to short-term disconnects in fundamental business strength and share price. Over the long run, though, those factors tend to align. Long-term investors shouldn't see anything in Domino's and Innovative Industrial's results that give them pause about their prospects for the future.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$133.09 (2.37%) $3.08
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,212.96 (1.76%) $575.77
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,158.24 (2.47%) $100.40
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$12,131.13 (3.33%) $390.48
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$365.91 (2.90%) $10.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.