Your Week In Brief

These Small Caps Are Betting Big on America Losing Its Mind
Oct. 17, 2020 04:15
Your Week In Brief

A confession: Acid is the major one drug I have not personally taken. A fragile ego structure and a deep-rooted history mental illness propping up my family tree have given me pause. Why then, did I dabble in crack cocaine of all things? I can't answer that other than to say, like more and more Americans, I'm a bit nuts. (CNBC's Jim Cramer used to be a heroin addict who lived out of his car…just sayin'.)

And that's what these stocks are betting on: An increasing number of Americans becoming increasingly anxious or depressed or worse. To wit, there were more than 72,000 fatal overdoses in 2019 and more than 48,000 suicides in 2018. Between March and June this year, calls to the helpline sponsored by the National Alliance on Mental Illness increased 65%.

From stocks focused on fighting depression via magic mushrooms and DMT to tech stocks offering new technologically-driven solutions to capitalize on America's new secular bull market: The mental health industry.

Hip to Be Square

If, either due to a dearth of good music in your record collection or a just an unbearable lameness of being you do not want to either invest in or ingest psychoactive substances, square-centered stocks like Neuronetics (Nasdaq: STIM) are a way to place a winning bet on America's mental maladies. The stock is up over 50% year-to-date, and trades around $6.18 per share. The company is small, and, while it has debt, it has far more cash than liabilities. So what does it do?

Neuronetics' flagship product is the NeuroStar Advanced Therapy System. NeuroStar uses transcranial magnetic stimulation (TMS) to create a pulsed MRI-strength magnetic field, which induces electrical currents designed to stimulate specific areas of the brain associated with mood.

In other words, shock therapy? Not really. NeuroStar uses TMS, which is not the same as electroconvulsive therapy (ECT), the latter preferred by the likes of Nurse Ratched. Even then, today's ECT isn't your crazy grandfathers' ECT. But you are still talking about directing electric current into patient's brain to cause "generalized" seizures. TMS, on the other hand, stimulates neuronal activity using high intensity pulsed magnetic beams. Both are only used for the treatment of depression as a last resort. While evidence suggests that ECT is more effective, TSM is—for obvious reasons—more popular with patients. As TSM begins to become a common treatment for clinical depression, Neuronetics seems well-positioned to capitalize on such a trend. I am long on Neuronetics.

Another small-cap fighting for mental wellness is Cassava Sciences (Nasdaq: SAVA). If you don't recall, the company's stock went wild in September, shooting up from around $3 per share to over $12 per share after announcing positive mid-stage for its experimental Alzheimer's drug, sumifilam. These encouraging results were reflected in a subsequent filing with the SEC in which board member Sanford Robertson reportedly bought up a ton of stock. The market followed, and even after such a run-up, the stock still trades over $10 per share. With no current drug approved by the FDA to slow down or reverse the hideous neurological effects of Alzheimer's, this stock has the potential to become one of the biggest stock stories in the mental health sector. One problem: Phase 3 trials are pricey and, with no revenues, the company might have to stall its advancement of sumifilam. All eyes—especially Sanford Robertson's—will be on big tech player Biogen's and its drug: The monoclonal antibody aducanumab as the company makes its case for this drug on Nov. 6 at an advisory committee meeting. Shareholders in Cassava hope management forgets the date.

Now, real drugs….


If you Google "CMPS," the Center for Modern Psychoanalytic Studies based in New York City appears first. Freudian psychoanalysis may be long dead, but as modern as the methods taught and practiced at this mental health center may be, doubtful they incorporate either the use or the suggested use of major psychedelics. But that is exactly what Compass Pathways (Nasdaq: CMPS) is doing. Rated below on Google search but above in imaginative care, CMPS went public on September 18, becoming the first company dedicated to research in the mental health benefits of psychedelics to trade on a major exchange. The result was an over 150 % pop in share price, only to go back down. A quick high followed by an unfortunate come down. As for those that got out at the high, they may still be in a manic state. The London-based company is currently enrolled in an FDA-approved Phase 2 clinical trial using its psilocybin-based therapy. For the squares out there, psilocybin is the psychoactive chemical found in mushrooms.

We All Live in an Anxiety-ridden Submarine

Studies are now supporting what Timothy Leary told us decades ago: Psychedelics are an effective treatment for mental health issues including depression, anxiety and addiction--ailments from which a shocking number of Americans suffer. Anxiety disorders are the most common mental illness in the U.S., affecting 40 million American adults who are 18 and older, or 18.1% of the population, every year. Add to that a decades-old opioid crisis compounded by a pandemic and its associated lockdowns, and you have a mental health crisis in this country of epic proportions. Indeed, while there is debate as to the extent the valuations of favored stay-at-home stocks represent a temporary or a permanent sea change in social and professional life, there is little debate that Covid-19 exposed and exacerbated the long-term mental and physical health of the American people. We may be crazier and sadder now because of the pandemic, but we will remain so long after it dissipates. Continued job losses through and increasingly sophisticated and manipulative social media advertising algorithms will lead to more isolation and more depression; less real connection, more real suffering.

To many, psychedelics offer an exciting new solution to an ever-growing problem.

O'Leary Wants to Operate on Your Brain

Even famous "Shark" Kevin O'Leary is bullish on psychedelics. Leary is an investor in Mind Medicine (Pink: MMEDF) whose stock has nearly tripled in the last month. The company is primarily focusing on developing a non-hallucinogenic version of the psychedelic ibogaine. Ibogaine is the root barks of the iboga tree of Central Africa and was first ingested by Pygmies. While there is no clinical evidence that ibogaine makes one more diminutive in stature, at only five-eight and one-half I'm not taking any chances. Mind Medicine has also conducted studies using ketamine (tried that), the horse-tranquilizer and popular club drug along with the quintessential club drug, MDNA. Add to that treatments based on LSD as well as DMT (the latter of whose psychoactive property is derived from ayahuasca), and you have a company unafraid to bet big on psychedelics. Mind Medicine is currently engaged in several clinical trials, none of which are believed to include podcaster Joe Rogan as an active participant.

Jokes aside, I believe that we will see these drugs become mainstreamed the way marijuana was. I also believe that for the vast majority of people, these kinds of experiences are not only psychologically beneficial, but truly transformative. The effort to fight addiction from other drugs and substances by way of psychedelics offers some exciting possibilities.

However, as the two opposing town hall "debates" last night showed, there are two camps in this country—and even the more openly drug-friendly one is not about to legalize acid no matter what Leary or O'Leary has to say about it. Short and mid-term, look for momentum opportunities in these and other stocks of aptly coined, "Shroom Boom."

However, with weed still classified as a Schedule 1 narcotic, I expect there will be some time the Shroom Boom truly explodes. For now, better to buy Spotify (NYSE: SPOT) and just its most popular podcaster Joe Rogan's psychedelic-laden advice with a grain of salt