Compass Pathways 2.0: A New Rally In Psychedelic Stocks?

In 2020, Compass Pathways sparked a major rally in psychedelic stocks.

In 2021, Compass Pathways is once again on the move. History may be about to repeat.

Psychedelic stocks have been trading flat-to-lower. Trading volumes have been very low.

Those words describe most of the price action that investors have seen for psychedelic stocks in 2021. But they also describe the trading of the small number of public companies in the sector in 2020 – right before Compass Pathways (US:CMPS) announced it was going public.
What happened next? Anyone already invested in these stocks can answer that question.

For those new to this emerging sector, the Compass Pathways IPO in September 2020 sparked a furious rally in the sector, with leading public companies like MindMed Inc (US:MNMD / CAN:MMED) and Numinus Wellness (CAN:NUMI / US:LKYSF) generating ten-bagger returns.

The next rally in psychedelic stocks?

While “flat to lower” has characterized the movement of these stocks through most of 2021, that hasn’t been the case recently.

Psychedelic Stock Watch alerted investors to these changing market dynamics in a recent article.
  • Cybin moved from a short-term low of $1.83 (on August 19th) to $2.80 by August 31st. More than 50% in less than 2 weeks. That followed an even longer and larger run for the company earlier this in the summer.
  • After hitting an all-time low of CAD$0.59 on September 22nd, Novamind jumped by over 60% in less than two weeks – before seeing some profit-taking over the past week.
  • Field Trip is currently more than 30% higher than its all-time low of $4.23 on September 20th.
  • Small Pharma is currently nearly 30% off its all-time low of CAD$0.27 on October 15th.
  • Compass Pathways is currently 19% above its 2021 low on October 6th.

More recently, these dynamics have not merely continued, they have accelerated.

Small Pharma (CAN:DMT / US:DMTTF) ended up jumping by 155% in one week, before seeing some profit-taking the following week. Since its October 22nd all-time low, GH Research (US:GHRS) is now up by 95%. Since its all-time low on October 25th, Entheon Biomedical (CAN:ENBI / US:ENTBF) has soared by 100%.

That’s not chump-change. Equally important, both GHRS and ENBI have seen robust trading volume supporting these jumps in share price.

Then there is Compass Pathways itself. CMPS has now risen 48% from its October 6th low, also on rising volume. Volume over the past two weeks has been the best for the stock since back in June.

Psychedelic Stock Watch tipped off investors about the prospects for a new rally for Compass Pathways as far back as September 23rd.
Are Psychedelic Stocks About To Heat Up (Again)?

On September 20th, Zacks Equity Research reported that Compass Pathways (US:CMPS) was showing “some of the highest implied volatility of all equity options today.” Why is that significant?

Volatility simply refers to the magnitude of price action for a particular stock or index. Thus, high implied volatility implies a big move – in one direction or the other. That’s where fundamentals come into play.

Compass is preparing to report the results from its recently completed Phase IIb clinical trial on psilocybin-assisted therapy to treat Treatment Resistant Depression (TRD). Results are highly anticipated, while the Mental Health Crisis continues to rapidly worsen.

Is CMPS likely to go down because the company is getting too close to reporting its clinical results, or the treatment market it’s targeting (TRD) is getting too large? No, obviously CMPS stock is more likely to go up for those reasons.

As noted above, the psychedelic drug industry is “moving full-speed ahead”, and some “catch up” in these stocks is long overdue. The quantity of these cheap stocks and the robust value propositions they represent provide plenty of attractive targets for investors.

Cheap stocks that can run a long way

Companies like Small Pharma and Novamind Inc (CAN:NM / US:NVMDF) remain attractively priced, even after their strong moves higher. But in an October 11th feature article, we also drew attention to some of the other unbelievable bargains in this space.

Typically, cash-to-market-cap ratios like this are only seen in dead-end sectors that provide little to no opportunity for investors. Conversely, psychedelic drug stocks represent the largest investment opportunity in life sciences of the 21st century.
Psychedelic stocks are not “cheap” because the industry has nothing to offer investors. They are cheap because the market is temporarily grossly mispricing these stocks. But for how much longer?

In addition to all of the robust gains reported above, other stocks in this space may also be starting to move.

MindMed is now up 17% since its October 27th close. Mind Cure Health (CAN:MCUR / US:MCURF) is up 18% since its October 25th close.

As noted above, MINDCURE represents one of the best values in the space at present. The company just reported its Q1 results for fiscal 2022 on October 27th. With cash and equivalents of CAD$15.6 million, MCUR remains one of the best-capitalized smaller companies in this space.

Because recent moves in psychedelic stocks are coming from such compressed valuations, these stocks can run a long way before even beginning to look fully valued. Investors sitting on the sidelines have already missed some big gains, but the best may be yet to come.

Déjà vu in 2021?

Compass Pathways sparked an enormous rally in psychedelic stocks in 2020. Why?

With its IPO, CMPS became the first NASDAQ-listed psychedelic stock. The company’s Phase IIb clinical trial of a psilocybin-based therapy for Treatment Resistant Depression is both the most-advanced and best-positioned R&D initiative among public companies. Compass Pathways became a catalyst for the whole sector.

With Compass now building on a strong rally in 2021, are there any new internal catalysts for CMPS that could help to light a fire under psychedelic stocks? Yes.

Compass is now about to report the results of its Phase IIB study – with the data eagerly anticipated across the sector. Those numbers are expected to come out some time around year end, now just two months away.

For investors eying the overall improving price action in psychedelic stocks, what should their strategy be?

For new investors to the sector, the strategy is simple: get in. Many of these stocks now appear to have made clear bottoms.

We’ve seen how fast these stocks can run (in 2020). New investors waiting for “the perfect price” for an entry point may simply miss the boat entirely.

For investors already invested in this sector, two potential strategies present themselves.

Those who subscribe to the old market adage, “buy on rumor, sell on news” will likely want to do their buying now. Loading up ahead of the Phase IIb results for Compass Pathways and then hoping/expecting to take some profits around Christmas.

Given the recent moves we’ve seen for many of these companies, that strategy may already be fully in play.

More conservative investors may wish to wait a little longer before pulling the trigger, hoping to get even better prices as the big news for Compass Pathways approaches. However, investors who choose to play “the waiting game” in a sector of already-undervalued stocks run the risk of getting in late – and being force to chase these stocks higher.

What if recent moves in psychedelic stocks are not the next “big rally” that investors in this space have been anticipating for most of 2021? Then simply wait.

Old-fashioned buy-and-hold investing.

Investors in psychedelic stocks have the luxury of being patient with their investments because the industry itself is so well-capitalized. With companies that are generally cashed-up for several years of operations, investors don’t need to worry if they don’t see a big return in two months – or even six months.

Psychedelic medicine is the future of mental health. Conventional healthcare has clearly failed in providing adequate treatment options.
Whether the market prices in this potential now or later, it’s coming. The two billion people with treatable (but untreated) mental health disorders represent not years but decades of robust growth potential.

Investors who missed getting into these stocks before the Compass Pathways IPO are kicking themselves today. Now, with Compass Pathways approaching a new, major milestone, investors don’t want to miss the boat twice.

DISCLOSURE: The writer holds share in MindMed Inc, Numinus Wellness, Small Pharma Inc, Entheon Biomedical, Novamind Inc, and Mind Cure Health. Mind Cure Health is a client of Psychedelic Stock Watch.

Deja vu (cover) by MQ-Illustrations is licensed under Adobe Stock


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