This Small-Cap Stock Is Up 140% This Year and Here's Why It Can Go Even Higher | The Motley Fool (2024)

For investors with a high level of risk tolerance, Mind Medicine could be an intriguing investment option.

Small-cap stocks can have exciting potential. At low valuations, there may be much more upside for investors than there can be for large tech stocks with market caps in excess of $1 trillion. One red-hot stock of late has been Mind Medicine (MNMD 0.71%). Shares of the psychedelic biotech company have jumped by close to 140% already this year. Here's why there may be room for the stock to rise even higher.

Promising results from a clinical trial have given investors reason for hope

Investors have been bullish on Mind Medicine recently because the company has released positive results relating to MM120 (its LSD-based treatment), which has shown effectiveness in reducing anxiety in patients. What's particularly promising is that only a single dose was used without any additional therapeutic intervention.

A comparable drug from Johnson & Johnson, Spravato, normally requires multiple treatments for the first four weeks, which gradually comes down afterward. MM120 has the potential to be a much more efficient treatment, which can result in better outcomes and fewer side effects for patients.

Given the potential for MM120, the Food and Drug Administration (FDA) granted it breakthrough therapy designation as a treatment for generalized anxiety disorder. The designation can help speed up the time that a drug comes to market.

Why the stock could go higher

Mind Medicine is moving forward with plans to initiate a phase 3 clinical program involving MM120 in the latter half of this year. It is also meeting with the FDA to discuss its phase 2 results. Any positive news relating to its discussions with the FDA or progress in its phase 3 trials could generate more bullishness and excitement behind the business and its prospects for long-term growth. A big reason for that is that Mind Medicine could establish itself fairly early on as a top psychedelics company.

The market for psychedelic drugs is still fairly small and has some regulatory hurdles. According to analyst estimates from Grand View Research, the global psychedelic drug market was worth roughly $1.6 billion in 2022. But it is growing at a compounded annual growth rate of more than 12%. It's an exciting growth opportunity in the healthcare industry. And given MM120's impressive results, investors eager to get in early could see plenty of reason to take a chance on the stock.

Mind Medicine does come with considerable risks

While there is certainly potential for Mind Medicine to one day have an approved product and maybe even become profitable, in the meantime, it's still a fairly risky investment. The company is going to need cash infusions in order to invest in research and development. And even if MM120 obtains approval, the company will need to spend money on commercializing the treatment and rolling it out.

As of the end of last year, Mind Medicine had just under $100 million in cash and cash equivalents on its books. During the year, it also used up $64.4 million in its day-to-day operating activities, which is more than the $50.1 million it burned through in 2022. Investors need to brace for the likelihood that share offerings will be frequent. The company announced one earlier this year, and with no revenue coming in, it's a pattern that is likely to continue, and it will weigh down the stock.

This Small-Cap Stock Is Up 140% This Year and Here's Why It Can Go Even Higher | The Motley Fool (1)

MNMD Shares Outstanding data by YCharts.

Should you buy Mind Medicine stock today?

Mind Medicine is a high-risk investment that isn't going to be suitable for most types of investors. But if you have the tolerance and patience to take on a volatile investment and are aware of the risks of Mind Medicine's business, this could make for an underrated stock to own given the progress MM120 has been showing in clinical trials.

However, for others, it's probably better to take a wait-and-see approach with Mind Medicine to see how MM120 progresses and what the company's outlook becomes for profitability in the future. In the meantime, there are plenty of safer growth stocks out there to choose from. Although you might miss out on gains by waiting to see how Mind Medicine's business evolves, you'll also minimize your risk by not jumping into what's likely to be a volatile stock for the foreseeable future.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

This Small-Cap Stock Is Up 140% This Year and Here's Why It Can Go Even Higher | The Motley Fool (2024)


This Small-Cap Stock Is Up 140% This Year and Here's Why It Can Go Even Higher | The Motley Fool? ›

Mind Medicine (MindMed)

Why are small-cap stocks doing well? ›

Small-cap stocks have a long-term performance advantage over large-cap stocks, and this is often referred to as the small-cap effect. Small-cap stocks are said to be economically sensitive and therefore rally in recoveries and lag heading into recessions.

Should I invest in small caps now? ›

High Growth Potential

Small cap funds primarily invest in companies with smaller market capitalisations, which often have significant growth potential. These companies are at an early stage of development and can experience rapid expansion, leading to higher returns for investors.

Is small-cap value worth it? ›

The Fama and French model expands on the capital asset pricing model (CAPM) by adding size and value factors to the CAPM's market risk. The Fama and French model suggests that small-cap stocks generally tend to outperform the markets, over and above large-cap stocks, on a regular basis.

Why are small-cap stocks so volatile? ›

Small caps are also more susceptible to volatility due to their size. It takes less volume to move prices.

Will small caps outperform in 2024? ›

Analysts forecast that 2024 earnings for small-cap companies will grow faster than large-cap earnings in most regions.

Is 2024 a good year for small caps? ›

The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.

Should I avoid small-cap funds? ›

If you are investing in mutual funds for a short duration, stay away from small-cap mutual funds. Small-cap mutual funds perform well over a long period of time. However, over a short period of time, they tend to be very volatile.

Why not to invest in small-cap stocks? ›

Small-caps are also the last to participate in a bull market. So if you own a small-cap heavy portfolio, and a bear market arrives, you may need to hang on for the next 8-9 years to get back to a good return. With large-caps, the losses are shallower and the recovery is much quicker.

How long should I invest in small-cap? ›

Long-Term Investors: Small-cap investments can be volatile in the short run, making them suitable for investors with a time horizon of seven years or more. Over the long duration, small-cap funds have the potential to generate significant returns.

Are small caps good in a recession? ›

Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).

What percentage should I invest in small-cap? ›

Small-cap stocks and asset allocation
Investment categoryAggressive investorsModerate investors
Small-cap stocks20%10%
International stocks20%15%
Emerging market stocks10%0%
Intermediate bonds10%30%
3 more rows

Do small caps really outperform? ›

In reality, many small-cap companies are well-established businesses with strong track records and great financials. And because they are smaller, small-cap share prices have a greater chance of growth. At the same time, small-cap stocks tend to be more volatile (and thus riskier) than their larger-cap peers.

What are the problems with small-cap stocks? ›

A Risky Proposition

A major risk for low-priced securities is the limited amount of publicly available information. Many of these securities are issued by small or emerging companies, which can make it difficult to find comprehensive information about the company's finances or business model.

What are the best small-cap stocks? ›

Best small-cap stocks, ordered by one-year performance
TickerCompanyPerformance (1 Year)
SWVLSwvl Holdings Corp1045.64%
CVNACarvana Co.836.92%
ZJYLJin Medical International Ltd775.82%
LABPLandos Biopharma Inc688.84%
3 more rows
Apr 2, 2024

What is the outlook for small-cap stocks? ›

After declining in 2023 on interest-rate pressures and bank-sector volatility (financials have a much larger weighting than for large-cap indexes), analysts expect earnings for small caps to jump 12% in 2024, compared to 9% for large caps.

Do small caps outperform the S&P 500? ›

Small stocks have popped in the past few days, outpacing the large-cap S&P 500. The next few days will show whether that can continue. The S&P Small Cap 600, an index of profitable companies with an average market capitalization of $3.8 billion, has gained 4.3% since hitting a low point in mid March.

Do small-cap stocks do well in inflation? ›

History shows that U.S. small-cap companies tend to outperform their larger counterparts when inflation and interest rates rise.


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