Biotech stocks can be incredibly attractive for risk-taking investors because of their ability to go parabolic in an instant. Whether it’s a promising clinical trial that leads to investor optimism or the approval of a drug, biotech stocks can quickly take off in value, and it can sometimes happen without warning.
There’s one biotech stock I’ve been following lately simply because it has made a monstrous move. And I don’t mean doubling or tripling in value, I’m talking about generating Nvidia-type returns — in less than a month’s time.
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And what’s most surprising may be that it’s up for seemingly no reason. That stock is Bright Minds Biosciences (NASDAQ: DRUG)
Bright Minds is not a stock that should have been popular with investors a month ago. Its market cap was around $5 million; it didn’t have a drug or treatment that was far enough along in trials where it may have been on the cusp of releasing some significant news.
There would have been no reason to suddenly get so excited about the business. Nvidia has been doubling its sales and profits with ease to justify its gains over the past few years, but that hasn’t been the case with Bright Minds.
Between Oct. 11 and Nov. 8, Bright Minds’ stock rallied an incredible 4,220%. Nvidia, by comparison, has generated 2,700% returns, but that’s been over a span of five years.
What’s shocking about the healthcare stock‘s rapid ascent is the reason it skyrocketed, and that’s because there seemingly was none. Prior to Oct. 14, the stock’s trading volume was often well below 100,000 shares per day.
On that day, however, there were more than 21 million shares traded. The next day, the volume would jump even higher to nearly 103 million shares. Things have cooled to some extent, but Bright Minds is still trading at elevated levels: Each day last week, its trading volume was above 300,000.
Bright Minds’ ascension was so perplexing that the company issued a press release on Oct. 15 stating that it was unaware of any reason for the unusual stock movement. This is what you would normally expect to see with high-risk meme stocks, which seemingly jump in value out of nowhere and seemingly for no obvious reason.
What has also surprised me about the stock is that speculators who bought it haven’t cashed out; it hasn’t plummeted back down in value after its initial spike. But the risk is that it could happen at any moment. Just as quickly as it soared in value, this speculative buy could quickly go back down in the opposite direction. And that’s because there isn’t a huge reason to invest in the stock today.
The company doesn’t generate any revenue, and it doesn’t have any catalysts on the horizon. It has one treatment in its pipeline that isn’t in preclinical studies, and that’s BMB-101, which Bright Minds is evaluating as a possible indication for rare epilepsies.
It recently launched a phase 2 trial of the treatment, which it has called a “breakthrough.” Investors, however, should be careful not to assume that it is a breakthrough study, which may suggest that the company’s treatment has achieved some extremely promising results and that it may be a game-changer for the business and the industry. That isn’t the case.
And my concern is that some investors may believe that Bright Minds did indeed have a breakthrough study, when in reality, all it did was launch a study, which it called “breakthrough.”
Bright Minds is only at the early stages of this phase 2 trial, and investors should tread carefully because it may still take years before the company obtains approval for any treatment. And there’s no guarantee that it will obtain approval at all.
In the meantime, it is burning through cash and may need to raise money frequently to fund its day-to-day operations, resulting in dilution for existing shareholders. In the trailing 12 months, the company has incurred losses totaling $3.6 million.
Bright Minds Biosciences isn’t a stock suitable for anyone besides speculators who have a high risk tolerance. The stock has achieved some impressive gains in a matter of weeks, but the market’s bullishness about it could end just as quickly as it started. The company may end up with an approved treatment for epilepsy, but it’s far too early even to tell how probable that might be.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
