- Implied volatility soars for two of the leading psychedelic stocks
- One of those stocks traded over 25% of shares outstanding in a single trading session this week
- A whole sector overdue for a major rally
It’s been a tough year (so far) for psychedelic stocks. General headwinds in equity markets and regular selloffs in U.S. tech stocks have taken a toll on stock performance.
As Psychedelic Stock Watch noted in a recent “report card” on the psychedelic drug sector, stock performance is one of the few areas where this rapidly emerging industry receives a failing grade in 2021.
Psychedelic Drug Industry Report Card For 2021
As investors in psychedelic stocks can attest to, most of these public companies have seen their share prices drift sideways-to-lower for most of the year.
The huge irony here is that (as noted above) the industry itself has made enormous leaps forward over the first eight months of 2021. However, with few exceptions these public companies have not been rewarded for their strong operational performances. In contrast, many of these same companies generated spectacular returns in 2020 – on the back of far less substantial news and corporate progress.
Is that now about to change – dramatically?
Options market activity signals big move in psychedelic stocks
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.
But it’s only one stock. Big deal, right?
On
September 22nd, Zacks was in the news again. This time, it was noting that
Seelos Therapeutics (US:SEEL) stock “had some of the highest implied volatility of all equity options today.”
Unlike Compass Pathways, there is no obvious share price catalyst for Seelos at the moment. The company has already had a good year, raising $64.5 million in an earlier financing and getting added to the Russell 2000 and 3000.
However, Seelos stock has already started moving. On September 21
st,
SEEL traded over 26 million shares on the NASDAQ, more than ten times average volume. The stock was up 13.68%. SEEL gave back some of those gains the next day (-2.31%), but volume was still roughly three times average.
This was enough to induce Psychedelic Stock Watch to do our own digging around in options markets.
The NASDAQ listings for
atai Life Sciences (US:ATAI) and
Field Trip Health (US:FTRP / CAN:FTRP) as well as the NYSE listing for
Cybin Inc (US:CYBN / CAN:CYBN) are still relatively new. Options trading in these stocks is still developing.
A look at options trading for
MindMed Inc (US:MNMD / CAN:MMED), which commenced trading on the NASDAQ back in April, shows some bullish indications.
With 3.113 million calls and 1.993 million puts, the put/call ratio for MNMD currently sits at 0.64. Market sentiment toward MindMed (as reflected in the options market) is clearly positive.
A whole sector that is overdue for a rally
It was almost exactly one year ago that psychedelic drug stocks took off, with the Compass Pathways
NASDAQ IPO being the primary catalyst. Today, potential catalysts for a new rally in psychedelic stocks are numerous.
- The Mental Health Crisis (now a pandemic) continues to rapidly worsen
- Considerable progress for psychedelic drug companies in 2021 in both drug and IP development
- Massive capital flows into the sector from institutional investors continue
- (Positive) coverage of psychedelic drugs in the mainstream media has soared
- Yet stock valuations for most companies have retreated in 2021
The treatment markets being targeted by these public companies continue to grow. R&D continues to get closer to the finish line. Corporate coffers are generally filled to the brim. The mainstream media gushes about how psychedelic drugs
“are poised to go mainstream”.
No market response in 2021 (for most of these companies) to all this forward momentum.
The industry is well overdue for a new rally to elevate these stocks to valuations that are a reflection of both the significant current progress in the industry, the enormous (and growing) commercial potential, and the rapidly growing interest in the sector.
In
the 2020 rally, psychedelic stocks produced several ten-baggers for investors.
That was
before institutional investors pumped over $1 billion in fresh capital into public companies that (as of today) have combined market caps of well under $10 billion.
It was
before atai Life Sciences, MindMed Inc, Field Trip,
GH Research (US:GHRS) and Seelos Therapeutics joined Compass Pathways as NASDAQ-listed psychedelic stocks.
It was
before an explosion in new analyst coverage and elevated price targets for many of these stocks.
It was
before the mainstream media 'discovered' both
the Mental Health Crisis and the
revolutionary potential of psychedelic medicine to address this crisis.
In short, there have been far more reasons in 2021 for these stocks to stage a big rally than there were at the time that the huge 2020 rally commenced.
Are psychedelic stocks about to heat up? Perhaps. Both the industry’s strong fundamentals and recent market anomalies are pointing in that direction.
Major new rally in psychedelic stocks: a question of “when”, not “if”
Why have these stocks not already staged a major rally this year? Persistent headwinds in the broader markets.
Those headwinds remain. However,
investors poured over $50 million into SEEL on September 21st alone, trading over 25% of total shares outstanding. The company traded an additional 7.6 million shares the next day, nearly three times average volume.
This reflects much more than casual interest in SEEL specifically, and the sector in general.
As Psychedelic Stock Watch
regularly points out to investors, there are
two billion (generally untreated) mental health disorders around the world today, leading to
~8 million preventable deaths per year. Both of these numbers are rising rapidly.
The
treatment markets being targeted just by the more advanced drug R&D are
worth a combined $330 billion, while the combined market caps of the public companies pursuing these markets is well under $10 billion. Virtually unlimited commercial potential in numerous multi-billion-dollar treatment markets where
conventional medicine has
already failed.
Maybe the next major rally in psychedelic stocks is not about to begin (yet). But when it arrives, there are many good reasons to expect an even more spectacular surge in these public companies than we saw in 2020.
DISCLOSURE: The writer holds shares in MindMed Inc and Cybin Inc.
