Over the short-term, Psychedelic Stock Watch sees the best investment opportunities from this IPO in other psychedelic stocks.
Big IPOs in an emerging industry are exciting events – and not just for the company going public.
In 2020, when Compass Pathways (US:CMPS) commenced trading in September it ignited the whole sector. Volume spiked and several psychedelic stocks delivered multi-bagger returns for investors.
Flash forward to February 2021. Now psychedelics investors are eagerly anticipating the IPO of ATAI Life Sciences.
ATAI is expected to immediately become the new industry leader among public companies once it starts trading. It has been the best capitalized private player in the industry.
Psychedelic Stock Watch has previously described ATAI as “a kingmaker” in the psychedelics industry. Its big-tent business model features numerous research partnerships with some of the most exciting other private players in the industry.
But is investing in ATAI itself the best way for investors to prosper from this high-profile IPO? A closer look at price action in the sector following the CMPS IPO is instructive.
Compass Pathways was NOT the big winner from its own IPO
Compass raised a whopping $146.6 million from its IPO financing, priced at $17 per unit. Compass quickly rose above $40/share in its first week of trading.
On the surface, it was a fast/easy double for investors buying in on the IPO. But the reality is that very few retail investors made a gain anywhere near that size on CMPS.
CMPS opened at close to $29. It traded no lower than ~$26 on its first trading day. By its 2nd trading day, it was already over $30 per share and investors have never had a chance to buy CMPS lower after that.
Its highest close was a very brief spike to $59. In short, even for retail investors who bought CMPS as low as possible, the best return they could have made on this investment is a bare double.
Those who bought in to the other leading psychedelic stocks at that time did much, much better.
Buying shares of CMPS (as close as possible to the IPO price) was a good investment. But buying shares of any of these other stocks – instead of CMPS – was a great investment.
ATAI Life Sciences about to commence public trading
Now it’s ATAI’s turn to go public.
When it completed its final private financing round ($125 million), ATAI declared its intention to go public in the spring of 2021. Some market speculation is that this IPO announcement could come at any time now.
ATAI is expected to have a valuation of $1 - $2 billion based on its IPO price. Psychedelic Stock Watch sees that as a conservative figure given its capitalization and strong R&D portfolio.
If the expected IPO pricing is correct, there should be some nice gains available off of that IPO price. But how low will retail investors actually be able to buy in?
That’s the first question. Two other obvious questions.
How high will ATAI run off of its IPO?
How far will other psychedelic stocks rise based upon the positive investor sentiment from the IPO?
It’s the answers to these questions that will dictate the optimal investor strategy here. To come up with estimates for these answers, one other question must be addressed.
How similar will the initial trading pattern of ATAI be, in comparison to CMPS?
The ATAI IPO strategy: buy other stocks first, ATAI second
There will be at least as much market attention and investor excitement concerning the ATAI Life Sciences IPO as there was for Compass Pathways – and probably more. ATAI has a larger and more diverse business model that can be expected to appeal to a larger number of investors.
The stock can be expected to open well above its IPO pricing, meaning (as with Compass) retail investors will not have nearly the same profit-making opportunity as insiders who are already holding stock when trading begins.
Given the (expected) stronger sentiment for ATAI, share price performance will probably exceed Compass, but by how much?
ATAI insiders would likely be thrilled if it performed twice as well as CMPS. If that is the case, then retail investors who get in as low as possible may see up to a 4X return off the IPO.
What should we expect in terms of share price performance for the other leading players in this emerging industry?
At the time of the Compass IPO, share prices in the sector were depressed and trading volumes were low. The IPO ignited sentiment. It brought in a huge surge in volume and other stocks broke out to new all-time highs.
As the ATAI IPO approaches, share prices are depressed and trading volumes are low. We recently alerted investors to the “low tide” in leading psychedelic stocks at present.
Along with significant declines in the share prices of these companies, trading volumes are roughly only half of what these stocks were generating during their big run in late-2020.
This drop-off in sentiment comes despite over $500 million in new investment capital flooding into the sector since the Compass IPO. These companies are fully cashed up.
From an operational standpoint, news flow from these psychedelic drug companies is robust and most companies have clearly advanced operations from where they were during the last rally.
There is plenty of room for these stocks to run. And there is every reason to expect them to do so – as soon as some new catalyst provides a spark.
The ATAI Life Sciences IPO certainly seems to fit the bill in terms of providing a major shot in the arm for the sector. “IPO fever” is currently at least as rampant among investors as COVID-19.
Will we see other companies recording ten-baggers off of the ATAI IPO, as we saw with the Compass IPO?
Perhaps not. But all indications are that we are looking at a similar scenario when ATAI commences trading.
Solid gains to be made on ATAI (for those who get in really early). But larger/easier gains to be made on other psychedelic stocks.
For one thing, there is no investor bottleneck to build positions as there will be with the ATAI IPO. Even large players have the opportunity to load up on other psychedelic stocks – at attractive prices – at their leisure.
But don’t wait too long.
Several psychedelic stocks at least doubled in the first week of the CMPS IPO. Those who wait to see if there will be new multi-bagger returns in psychedelic stocks from the ATAI IPO may miss out on these gains by not adding to their positions now.
Buy ATAI later?
Compass Pathways has hit an all-time (intraday) high of $61.69 since it went public. But it has fallen well off that level.
In recent weeks, investors have been able to buy CMPS close to $40. And it currently sits at $45.85.
Compass Pathways has perhaps the best-positioned individual R&D initiative in the industry: its psilocybin-based therapy for treatment-resistant depression.
CMPS is in a Phase 2b clinical trial, which the FDA has already fast-tracked via Breakthrough Therapy Designation. The company is well-capitalized and over the longer term could generate strong additional returns for investors.
But you didn’t need to buy into Compass at the time of its IPO to be positioned for those returns. At the most, investors missed out on half of the long-term profit potential by not adding a position right away.
In contrast, even after the pullback in other psychedelic stocks these companies have still locked in larger gains than CMPS. Buying into Compass (at the time of its IPO) instead of these other psychedelic drug stocks was clearly an inferior strategy.
Even if ATAI significantly outperforms Compass immediately after its own IPO, investors still have better odds buying these other stocks. Think about it.
If ATAI outperforms Compass, it will attract even more media attention and more investors dollars to the sector. In other words, some of these other stocks could (potentially) get an even bigger boost from the ATAI IPO than from the CMPS IPO.
For psychedelics investors who are understandably interested in acquiring a position in ATAI, be patient.
Look for better gains in other psychedelic stocks first. (Hopefully) fund your position in ATAI with the profits from those trades.
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.