Part 1 of this series presented a multitude of factors that could trigger a rally for psychedelic stocks on an individual basis. Now we look at the sector-wide catalysts: events that could float everyone’s boat.
Psychedelic drug stocks are overdue for the next leg of their rally. After weeks of sideways trading, that would seem to be a fair conclusion based upon an objective look at this emerging industry.
This assessment starts with the Mental Health Crisis. Over 1 billion people suffer from stress-related conditions like depression, anxiety, addiction and PTSD.
Existing standards of care for these conditions are grossly inadequate. Clinical trials on psychedelic drugs show the clear potential to not merely improve the standard of care but to revolutionize treatment for these mental health conditions.
Mental health treatment eats up roughly $300 billion in spending each year in the United States alone. Much of that money is currently being funneled into therapies that offer minimal efficacy.
There is a big opportunity for the psychedelic drug industry. Yet most psychedelic stocks have been stuck in a trading range since late December.
Part 1 of this series looked at the individual drivers that could kick-start new rallies for these companies. In Part 2, we’ll take a broader look at the sector-wide catalysts that could easily launch a major new rally in this space.
- Cheap stocks
- Rotation into biotech
- A cashed-up sector
- ATAI IPO
- MindMed uplisting
In December, with psychedelic stocks at their 2020 peak, a few of these companies were looking quite expensive.
Both MindMed Inc (CAN:MMED /US:MMEDF) and Numinus Wellness (CAN:NUMI / US:LKYSF) delivered ten-bagger returns from mid-September into early December. Several other companies produced multi-baggers.
As these companies were hitting new highs, they were also cashing up with very robust financings. As Psychedelic Stock Watch noted in Part 1, public companies (alone) raised US$371 million in the final months of 2020 and into early 2021.
Then they corrected. Several of the psychedelic stocks that delivered the best returns in 2020 were discounted significantly from their 2020 highs.
Lower stock prices + a lot more cash = cheap stocks.
By our calculation, Mind Cure Health (CAN:MCUR / US:MCUR) is currently the cheapest, with a cash-to-market-cap ratio of ~3:1. But most psychedelic stocks are looking attractively priced at current market capitalizations.
Where only a few companies in a sector are attractively priced, that’s a stock picker’s market. But when everyone is looking cheap, this creates the potential for a sector-wide feeding frenzy.
The rotation into biotech stocks has begun
What could trigger a new feeding frenzy in psychedelic stocks?
With an ocean of capital sloshing around in global markets, how about a general rotation into biotech stocks? That’s what BNNBloomberg (and other market observers) say is happening right now.
Biotech stocks are the new market darlings in early 2021, but investors haven’t turned their focus toward psychedelic drug stocks…yet.
How do we know this? As Psychedelic Stock Watch recently observed, the sector is currently at “low tide”. That’s not just an assessment of stock prices.
Trading volumes for most of the leading psychedelic stocks are only a fraction of what we saw when the sector heated up in 2020.
As an emerging sector barely a year old, this is still a very small space. Any significant surge of investors into these companies is going to cause stocks to pop.
With the combined market caps of public companies still just a few billion dollars, a large flow of investor capital into this industry could (easily) cause the whole sector to increase by several multiples.
A cashed-up sector
In Part 1, Psychedelic Stock Watch pointed to the massive capital-raising done by these companies as (obviously) a driver for the individual companies who have raised this cash. Why do we also see this as a sector-wide catalyst?
If many/most of these companies needed more capital, this could quickly put the brakes on a new rally as companies needed to dilute their share structure to increase funding.
That’s not going to happen. If a few of these well-capitalized companies run up to expensive levels (again), investors have several other well-capitalized options to choose from. An overall rally can continue.
Stocks are cheap (relative to 2020 prices), collectively. Companies are cashed up – collectively. How often do investors encounter a set up like this in a high-growth, emerging sector barely a year old?
If the rotation into biotech continues, these stocks could run a long way from current price levels. But we haven’t even gotten to the sector-wide catalysts about which investors are most excited.
ATAI Life Sciences IPO approaches
The catalyst for psychedelic stocks that has investors most excited is the approaching IPO for ATAI Life Sciences.
For investors new to the sector, ATAI is simply the largest private player in the space – about to go public. ATAI’s business model is focused on psychedelics R&D partnerships, with companies that ATAI sees as having strong potential.
Its premier psychedelics partnership is with Compass Pathways (US:CMPS). ATAI holds a significant (>20%) interest in CMPS.
ATAI is expected to immediately become the new industry leader among public companies, eclipsing Compass and MindMed.
Many psychedelics investors are (naturally) interested in investing in ATAI. The question is: at what price will ATAI be valued, and at what price will retail investors be able to gain entry when the stock opens?
Ironically, the popularity of ATAI and the strong demand for its shares may preclude most retail investors from being able to buy in at an attractive entry point. For this reason, Psychedelic Stock Watch has already been speculating on how the ATAI IPO might be a catalyst for other psychedelic stocks.
There is good reason (and a strong precedent) for thinking that the ATAI IPO will be a sector-wide catalyst for psychedelic stocks.
Look at the Compass Pathways IPO. It ignited the whole sector, including being the primary catalyst for the subsequent ten-baggers generated by both MindMed and Numinus.
What’s the same:
- Stock prices are again depressed
- Trading volumes are once again low
- A lot more investors already know about the sector
- A lot more capital is already in the corporate coffers of these companies
- A general rotation into biotech stocks is already underway
In short, not only are there good reasons to see the ATAI IPO as another sector-wide catalyst, it could even be a stronger catalyst than the Compass IPO (for reasons given).
MindMed uplisting to NASDAQ
Another potentially similar catalyst for the sector would be the successful uplisting of MindMed on the NASDAQ. MindMed expressed its intent to uplist on the NASDAQ as far back as late September 2020.
A straightforward review by the NASDAQ usually leads to a decision in roughly a 4 – 6 week period. Thus, most investors were expecting this to have been resolved (one way or another) much sooner.
However, the NASDAQ has some lesser-known uplisting requirements that can delay this process – especially for OTC-listed companies. A decision should be forthcoming in the spring.
Given MindMed’s strong success in raising capital, its impressive share price performance, very strong trading volumes, and very deep psychedelics R&D portfolio, there are good reasons to believe its uplisting application will be successful.
That would mean another NASDAQ-listed psychedelic stock. Another potential sector-wide catalyst – and perhaps even a stronger one.
If MMED successfully uplists, many investors will start looking at other psychedelic stocks as potential uplisting candidates.
Part 1 of this series listed the powerful individual drivers that support higher share prices for many of these stocks.
Part 2 has presented the potential for a number of sector-wide catalysts – catalysts which are either already present or which should occur in the first half of 2021.
What happens when these sector-wide catalysts start combining with these individual drivers? And then the current mania for biotech stocks latches onto the psychedelics space as well?
Before the big rally in psychedelic stocks in 2020, these companies were largely unknown. There was little capital backing most of the pubcos.
Today, several of these companies already have strong investor followings. The sector is fully cashed-up, with public companies having raised US$371 million just since mid-September.
There are no guarantees in investing. But the current set up for psychedelic drug stocks is unquestionably a unique event in markets. And perhaps a once-in-a-lifetime opportunity?
DISCLOSURE: The writer holds shares in MindMed Inc, Numinus Wellness, Cybin Inc and Mind Cure Health. Mind Cure Health is a client of Psychedelic Stock Watch.
Published at Thu, 11 Feb 2021 06:00:09 +0000