Why Getting In Early Is Especially Important With Psychedelics Stocks
Getting in early.
It’s a two-edged sword in the world of investing.
On the one hand, getting in early in an emerging sector that subsequently takes off can produce phenomenal returns.
On the other hand, getting in early in a new sector that quickly fizzles out can generate losses on a similar scale. The rise and fall of blockchain stocks immediately comes to mind here.
With that in mind, how are we to assess the emerging psychedelics industry, and the public companies now trading in this sector?
No one can guarantee the commercial success of this new field of medicine. However, there are two reasons to view psychedelic drugs as a bona fide branch of emerging medical therapy.
Early clinical trial results have shown spectacular treatment potential in a number of areas.
Psychedelic drugs are targeting hard-to-treat medical conditions (such as depression and addiction) that have huge potential markets and currently have very poor treatment options.
The need is here.
The results are here.
The market potential is enormous.
Another factor that argues for early success in the psychedelics space is that these are drugs that have been artificially closed off for R&D and commercialization due to drug prohibition statutes. As these prohibitions now ease, we are seeing an explosion in medical research on the therapeutic potential of psychedelics.
Cannabis déjà vu?
By now, cannabis investors will be experiencing a strong sense of déjà vu.
Cannabinoid-based medicines have also generated many exciting treatment successes, both empirically and in clinical settings.
Cannabinoid-based medicines are also targeting many hard-to-treat medical conditions. Indeed, it was the effectiveness of cannabis in addressing hard-to-treat medical conditions (such as chronic pain) that set in motion the dismantling of cannabis Prohibition.
For these reasons, cannabis is an important parallel for potential investors in psychedelics stocks. What can investors learn from the cannabis sector?
First of all, reject all of the nonsense from cannabis-illiterate analysts that “cannabis is a bubble”.
The use of cannabis for medicinal purposes continues to rise. Cannabinoid-based R&D continues at full tilt.
Most legal markets for recreational cannabis have generated (and continue to generate) strong growth.
So why the collapse in valuations for cannabis companies?
- Extreme intransigence in implementing legalization from politicians/bureaucrats in most jurisdictions
- Extreme incompetence in implementing legalization from politicians/bureaucrats in most jurisdictions
The cannabis industry has retrenched and consolidated (primarily) not due to poor execution from cannabis companies. Rather, it’s because of poor execution from bureaucrats – and broken promises from the politicians.
Remember how the 2018 U.S. Farm Bill was supposed to lead to a pot of gold for U.S. hemp farmers? Farmers grew the hemp, but the politicians and regulators failed to open up the commercial markets for revenue generation.
But investors who got in early with cannabis stocks did spectacularly well.
From September 2017 to January 2018 alone, the entire sector more than tripled.
Early investing – and early profits – were based on the potential of the cannabis industry.
Stock valuations plummeted when the politicians and bureaucrats made it impossible for the cannabis industry to deliver on this potential, at least over the shorter term.
Learning the cannabis lesson
This is the “lesson” that investors need to learn as they consider the potential of the psychedelics industry and psychedelics stocks.
Like cannabis, there is strong evidence that psychedelic drugs can revolutionize medical treatment in many areas.
Like cannabis, the thawing of drug prohibition has led to an explosion in R&D activity.
And like cannabis, we will likely see a pullback in this sector as investor focus shifts from the overall potential of the industry to the execution of individual companies.
Such execution is largely dependent upon the good faith and cooperation from politicians and bureaucrats. For this reason, there is a significant chance that we will see a similar evolution in stock prices for these companies.
A strong initial growth phase. This will be followed by an intermediate trough as the industry evolves from medical potential to commercialization – and almost inevitably experiences regulatory delays and roadblocks along that journey.
For investors who subscribe to this analysis, the recent pullback in psychedelics stock valuations represents an exciting entry window.
MindMed Inc (CAN:MMED / US:MMEDF)
– Closed at a high of CAD$0.79 on March 31, 2020
– Currently trading at CAD$0.435
– Off 45%
Champignon Brands (CAN:SHRM / US:SHRMF) (currently halted)
– Closed at a high of CAD$2.38 on May 19, 2020
– Currently trading at CAD$0.89
– Off 63%
Revive Therapeutics (CAN:RVV / US:RVVTF)
– Closed at a high of CAD$0.36 on May 26, 2020
– Currently trading at CAD$0.23
– Off 36%
The retreat in share prices for these psychedelics pubcos isn’t based on any sort of adverse news (Champignon’s fall came before its regulatory review). These companies remain active and R&D news remains very bullish.
Rather, this appears to be a lull in sentiment after these stocks went on big runs earlier in the year – and early investors have taken some profits.
With only a handful of publicly traded companies in the psychedelics space at this time, it is still very early in the evolution of this sector.
Getting in early: greater risks, much greater (potential) rewards.
The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.
The opportunity to “get in early” only comes along once with every emerging industry. For investors interested in psychedelics stocks, the time is now.
DISCLOSURE: The write holds shares in MindMed Inc.
Published at Fri, 17 Jul 2020 06:00:01 +0000