- The COVID-19 pandemic is creating enormous economic uncertainty (and risk)
- Investors always need to hedge against major risks
- Psychedelic drug stocks are arguably the best hedge against COVID-related risks
What is the greatest generator today of economic and market uncertainty?
That’s a simple question to answer. The COVID-19 pandemic has totally disrupted the global economy. It has already resulted in one market panic – and unprecedented emergency financial measures to stem that panic.
As the spread of COVID-19 infections is rising once again in most of the Western world, this uncertainty can only increase.
A basic principle of investing is that it is essential to hedge against significant market and economic risks.
The most elementary example of “hedging” behavior is all around us: diversification.
Why don’t people put all of their investing capital into their favorite stock? Why not put all your eggs in one basket?
There are few guarantees in life. Investing all your capital in one “can’t miss” stock – and then watching it crater on some unexpected event – can devastate one’s financial future.
Other types of hedging are also common.
Investors hedge against currency risks. They hedge against interest rate risks. They hedge against crop risks. And they generally hedge against economic risks.
The COVID-19 pandemic is a huge economic risk factor. Everyone can see that. But how do we effectively hedge against this risk?
How to hedge COVID-19 risk
One interesting option for investors to consider is psychedelic drug stocks.
That may seem to be a bizarre recommendation to those who are unfamiliar with the psychedelic drug sector, especially given that most of these drugs have been criminally prohibited for roughly 50 years.
In fact, it is this drug Prohibition that is part of the reason for the growing investor excitement surrounding the psychedelic drug space.
Medical research on the potential medicinal uses of this class of drugs ground to a halt for half a century. Now the doors to research are once again opening wide – and just in time.
A rapidly worsening Mental Health Crisis is sweeping the planet (exacerbated by COVID-19). It affects more than 1 billion people. Psychedelic drugs are being widely hailed as the best hope to address this Crisis.
Based on the size of this problem, the size of the opportunity associated with it, and the potential of psychedelic drugs as medicines, numerous big-name investors have already climbed aboard the psychedelics bandwagon.
PayPal’s Peter Thiel. Go Daddy’s Bob Parsons. Both are Silicon Valley billionaires.
Shark Tank’s Kevin O’Leary. Former Canopy Growth CEO, Bruce Linton. Wall Street heavyweight Mike Novogratz.
These are just a handful of the big backers of psychedelic drug research and psychedelic drug stocks like Compass Pathways (US:CMPS) and MindMed Inc (CAN:MMED / US:MMED).
Why are psychedelic stocks a hedge against COVID economic risk?
Most of these major investors have been supporting the psychedelic drug industry well before the coronavirus pandemic surfaced.
This is fortuitous for them – and others who were already backing this sector. Because the COVID-19 pandemic is creating an even more urgent need for new drug therapies to address stress-related conditions like depression, anxiety, addiction and PTSD.
Why “new” therapies”? Because mainstream medicine currently does an abysmal job of treating (in particular) depression, addiction and PTSD.
A huge need. Wide-open treatment markets.
It gets better.
Big Pharma has largely walked away from mental health-related drug R&D. By 2016, multinational pharmaceutical companies had already reduced funding such research by 70%. Little competition.
If the COVID-19 pandemic worsens (or simply continues), the imperative need for new mental health therapies – and drugs – will become an even greater emergency.
Compass Pathways has already obtained Breakthrough Therapy Designation for its Phase 2 clinical trial for psilocybin-based treatment of depression. This will help fast-track the approval (and potential commercialization) of this psilocybin-based drug.
As psychedelic drug research programs continue to produce amazing results, more research programs can be expected to be fast-tracked.
Only a small minority of sectors aren’t being adversely impacted by the COVID-19 pandemic. An even smaller number of industries have actually benefitted, such as basic necessities like food retailing.
But food retailers have supply chains. A second wave of COVID-19 could have a more serious impact on supply chains, jeopardizing the economic health of many retailers.
Clearly, the psychedelic drug sector is one of the only industries for which COVID-19 is actually improving economic conditions (and investment opportunities).
But the psychedelics space is also an emerging industry coming out of a 50-year deep-freeze. This implies much greater growth potential than established industries like food retailing.
Even among industries that are benefitting from the COVID-19 pandemic, psychedelic stocks can be reasonably expected to outperform.
Psychedelic stocks are very well-positioned to allow investors to hedge against COVID-19 economic and market risks.
What if the COVID pandemic suddenly/quickly recedes?
The advantage of a hedge is that (by definition) it will outperform under market conditions for which the hedge was acquired.
The major disadvantage of hedging is that if the anticipated risk does not materialize, hedges will generally greatly under-perform other investing strategies. They are usually a one-trick pony for investors.
Not so with the psychedelic drug industry and psychedelic stocks.
What happens if an effective vaccine for COVID-19 is rolled out in the near future? Or, what if the much-dreaded “second wave” simply peters out on its own?
Some tech stocks have benefitted from the “cabin fever” of COVID lockdowns and have seen extra revenues as a result. These also tend to be the most richly valued (overvalued?) stocks in the marketplace.
An effective COVID-19 vaccine would be good news to almost everyone. But it would be potentially disastrous news for many tech darlings that are already priced beyond perfection.
For the psychedelic drug industry, if the COVID-19 pandemic ended tomorrow, there would be still be a Mental Health Crisis afflicting more than 1 billion people.
There would still be a complete absence of adequate treatment options for most of these sufferers.
In short, with or without a pandemic, governments and regulators will still be feeling enormous pressure to expedite psychedelic drug research (and commercialization) to address this mental health emergency.
Huge potential markets already exist for psychedelic drugs
Psychedelic drug stocks are not merely a good investing opportunity. They represent a big opportunity.
In the U.S. alone, mental health services was a $225 billion treatment market in 2019, estimated to grow to $239 billion in 2020 (but that was before the coronavirus pandemic struck).
Depression, anxiety, addiction, and PTSD are all individual multi-billion-dollar treatment markets. And psychedelics-based research on other lucrative treatment markets is also currently underway.
Peter Thiel was backing Compass Pathways long before the world ever heard of COVID-19.
Media icons like Tim Ferriss and Joe Rogan have been banging the drum about the potential of psychedelic drugs for over five years.
Psychedelic drugs were already viewed by a lot of astute observers as the best investment opportunity today in life sciences even without a coronavirus pandemic. COVID-19 merely amplifies this potential.
For these reasons, many investors will see psychedelic drug stocks as not only a spectacular growth opportunity, but also their best hedge against COVID-19 economic/market risks.
DISCLOSURE: The writer holds shares in MindMed Inc.