Editors Note: This article was republished with permission from Microdose.buzz.
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Investor interest in the emerging psychedelic medicine sector is on the rise, attracting significant attention from billionaire investors, high profile celebrities, and dynamic entrepreneurs. As groundbreaking clinical research continues to bolster the momentum of the psychedelic industry, many are drawing important lessons from the “green rush” experienced by cannabis investors. Indeed, there are some critical cannabis takeaways that current psychedelic investors can benefit from reviewing. This guide will explore five things every psychedelic retail investor can learn from the cannabis industry.
Many cannabis investors were not aware that executive insiders are required to disclose when they were buying or selling their shares. There have been numerous points in the cannabis industry where heavy selling by an executive signaled the top and the beginning of a steady decline. Brendan Kennedy, CEO at Tilray, famously dumped $11 million in stock and was called out about it on TV (the stock, which was at $74.21 when Kennedy sold his shares, is now at $6). Additionally, Canopy’s executive team mass dumped in September 2018–one of the bubble’s final peaks. If you are a psych investor and know that revenues are a long way off, watch for executive dumping.
Lesson #2: Tracking Promises and Projections
While actual revenues are a long way off for many psychedelic companies, that does not mean you can’t use other measures to determine a company’s success today. Plus, you don’t even need to be a finance expert or have a background in reading complicated financials to do this. A simple way to hold companies accountable that have long paths to profitability is to track the promises and projections they make and see how well it matches up with reality. Companies that promise the world but then routinely fail to meet their own targets can be a sign that the company may have serious problems. Aurora Cannabis (NYSE: ACB)famously promised to be EBITDA+ in 2018… then 2019… and then, 2020… and now, 2021… If a company can’t even meet the standards they set for themselves, it is a reason to be wary.
Lesson #3: Equity Analysts & Price Targets Are Not Infallible
For an inexperienced retail investor, it can be easy to look to a subject-matter authority when it comes to whether or not a stock will succeed–especially considering the complex nature of clinical trial data surrounding psychedelic medicine.
Like many modern investors, you might be in a totally unrelated field, but understand the bigger market opportunity and want to pick market winners in the psychedelic space. One of the most common ‘authorities’ people point to are equity analysts at investment banks whose job it is to cover these stocks and provide price targets, which usually give an estimate 12 months out. Suffice to say, these price targets are not guarantees of anything, and many of them have been staggeringly wrong. Equity analysts, who are nominally supposed to be independent of the bankers who work at the same firm, can still be pressured to present rosier pictures on future share prices than some of these companies deserve.
Simply put, don’t think that just because a company has a great price target from an investment bank that it means it will go up. After all, the cannabis industry has been riddled with a history of terrible predictions.
Lesson #4: Be Wary of Hollow Press Releases
Perhaps surprisingly, many public companies have a desire to constantly be in the news with announcements of new deals, new acquisitions, and new products. Unfortunately, for these companies, most aren’t actually doing enough to justify the constant attention. This doesn’t stop companies from constantly pumping out press releases, which can be completely inane (e.g. “our executive signed a book deal!”).
Executives will also use press releases to pump out half-baked arrangements that may have no chance to come to fruition. These can be supply deals worth X amount if an insane number of conditions are fulfilled or can be announcements that sound promising (we’ve entered a new market), but there is barely anything there. Investors should be wary of companies frequently pumping out non-material press releases.
Lesson #5: Take Note of Paid Promotion
Many cannabis companies spent exorbitant sums of money on paid promotion and investor relations at the expense of their operating business. Yes, this promotion did raise the values of their stocks in the short-term as more people picked up on the company, but in the longer-term, it was no leading indicator of success. While the purpose of this point is not to demonize paid promotion entirely, because it certainly can have value when used consciously. But investors should be wary of companies engaging in aggressive or expensive promotion–especially if insiders are selling into the promotion as mentioned above. They should also be wary if the amount spent on advertising is far in excess of things they should be focusing on such as R&D, depending on the nature of the company.
Closing Thoughts and The Big Takeaway
As the psychedelic renaissance continues to impact capital markets, the need for sound strategies and mindful investment practices is greater than ever before. This guide explores five key concepts every psychedelic retail investor can learn from the cannabis industry. Perhaps the biggest takeaway here is that every investor must take responsibility for themselves and do their own research and due diligence.
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