I’m getting a lot of questions about psychedelic stocks. The public suddenly achieved mass awareness about the existence of these stocks over the past week.
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This expanded consciousness can be attributed to President Trump’s executive order, signed last week, to accelerate research and improve access to drugs like psilocybin and MDMA. The hope is that these drugs will eventually be used as unconventional treatments for serious mental illnesses.
Warning Label
Be forewarned. Like the drugs themselves, experimenting with psychedelic stocks can be dangerous. Many of these companies have small market caps and trade on minimal volume. This leads to wider spreads, which can become an obstacle to profitability.
There is also a chance that the popularity of these stocks could be transitory. That’s what happened with marijuana stocks — an initial flurry of activity, followed by a long, slow decline.
Shareholders of names like Tilray Brands (TLRY) know firsthand the damage that can occur. Shares of the consumer cannabis company have lost 95% of their value over the past five years.
Here are three ways to play the rally in psychedelic stocks:
The Diversified Route: AdvisorShares Psychedelics ETF
Perhaps the safest way to approach the psychedelic sector is to take a diversified approach via an ETF.
The AdvisorShares Psychedelics ETF (PSIL) reached a multi-year high at Monday’s open, and has drifted lower since then. PSIL becomes a potential buy if it closes Monday’s gap (point A) and pulls back to the $18.80 area.
Even if that gap does fill, I’m in no hurry to buy just yet. I’ll be waiting for price and volume to provide further buying clues.
The Established Route: Neurocrine Biosciences
At $13.15 billion, Neurocrine Biosciences (NBIX) has one of the largest market caps in the psychedelic sector. This company has been publicly traded for nearly 30 years.
The San Diego-based pharmaceutical company develops treatments for neurological and psychiatric disorders. Neurocrine has teamed up with Tokyo-based Nxera Pharma to create a drug for schizophrenia that recently began phase 2 trials.
Over the past 10 years, the stock’s activity could be described as generally bullish.
The company’s shares are down 7% this year, but have gained 28% over the past 12 months. Neurocrine Biosciences is scheduled to report earnings after the close on May 5.
The Speculative Route: Definium Therapeutics
Shares of Definium Therapeutics (DFTX), formerly known as MindMed, have already gained 68% this year. Over the past 12 months, the shares have nearly quadrupled in value.
Definium has a market capitalization of $2.3 billion.
The New York-based company focuses on a class of drugs called psychoplastogens, which include LSD and ketamine, for the treatment of major psychiatric disorders. Definium is scheduled to report earnings on May 7.
Bottom Line
Most of the companies mentioned in this article will report earnings early next month. This means the above charts could look very different a few weeks from now. This gives us more time to observe price action and volume patterns, so there is no hurry to buy shares at the moment.
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This article is being shared as premium content from TheStreet Pro. It was written by Ed Ponsi