It might seem rather odd to invest in a company investigating a psychedelic drug candidate, a hyped-up electric vehicle (EV) manufacturer, or a flower vendor. But often, it can pay off handsomely to have investment interests that are distinct from others or packed with growth potential. The companies I'm alluding to here are Compass Pathways (NASDAQ:CMPS), Tesla (NASDAQ:TSLA), and 1-800-Flowers.com (NASDAQ:FLWS).
As unusual as these companies' business ideas and technology are, the three stocks have gone up 67%, 64%, and 19%, respectively, over the past 12 months. Meanwhile, the S&P 500 index returned just 14%. Let's look at how these niche stocks could add serious wealth to your portfolio.
1. Compass Pathways
Compass Pathways is a leading investigator of the use of psilocybin for the treatment of depression. Psilocybin is a substance found in "magic mushrooms" that causes intense hallucinations. During the 1960s, psilocybin came under scrutiny as it was increasingly associated with the counterculture movement. Fearing the escalation of societal unrest, conservative leaders enacted legislation, such as the 1970 Controlled Substances Act, that outlawed the drug.
However, the political reasons behind psilocybin's ban are becoming increasingly obsolete as researchers uncover its medical benefits. There are already more than four independent studies supporting such findings. They took place at several prestigious universities across the world and involved close to 100 patients.
In these clinical trials, patients with depression showed significant symptom improvement after taking psilocybin. The treatment difference, as measured by Cohen's d (a common way to measure effect size), ranges from 0.81 to 2.98. Meanwhile, patients with depression only saw improvements upwards of 0.32 in the same metric after taking standard antidepressants.
These studies suggest that Compass Pathways could advance the world's first psilocybin-based antidepressant to market -- with revolutionary effects. In a phase 1 trial, the company's drug candidate induced several symptoms that were thought to correlate with therapeutic signals and were well tolerated. However, the results were preliminary due to the small number of participants enrolled, and no conclusions about its efficacy can be drawn.
The company is expecting a phase 2b data release later this year. If all goes well, the company would have market exclusivity in the U.S. and EU for between 5 and 11 years upon regulatory approval. Right now, psilocybin is a Schedule I prohibited substance (alongside drugs like marijuana and heroin), so consumers would face criminal risks if they tried to purchase cheaper versions on the black market.
Over 100 million people around the world suffer from an aggressive form of depression. 80% to 90% of those patients relapse despite taking at least two courses of medication or undergoing cognitive behavioral therapy. In the U.S. alone, these patients can accumulate up to $25,000 per year in medical expenses. Compass Pathways truly has the potential to address an unmet medical need, and might just be the top revolutionary healthcare stock to buy right now.
It wouldn't be wrong to call Tesla the growth stock that everyone's afraid to buy. Right now, Tesla's market cap is bigger than the world's nine largest auto manufacturers combined.
However, Tesla is also leading a revolution across the auto industry. The demand for electric vehicles has never been higher. At the moment, the ideal EV among consumers costs around $36,000, has a minimum range of 291 miles, and requires at most 31 minutes until full charge. Tesla's Model 3 can almost meet all three requirements, in stark contrast to the Chevy Volt and the Nissan Leaf, which can only meet one or two out of the three.
In addition, a significant portion of an EV's price comes from the cost of the battery. That, however, is becoming cheaper each year. In 2013, an EV battery's average price was $668 per kilowatt-hour (kWh). Last year, it amounted to just $137 per kWh. That development is good news for Tesla, which has several large production plants dedicated to mass production of EVs. It is currently delivering about 500,000 cars per year, nearly half of its total capacity.
Last year, Tesla's revenue increased by 46% from 2019, reaching $10.7 billion. Its profits more than doubled year over year to $903 million. For these reasons, I think Tesla stock is well worth its premium despite trading at 23 times revenue (while some of its competitors are trading at less than one). Valuation can't be the sole focus when it comes to companies with hyper-growth potential.
As the pandemic wears on, 1-800-Flowers.com is helping Americans connect with one another, even when we're physically apart. It offers various gifts, bouquets, and flowers delivered right to your doorstep -- sometimes on the same day as you order. Now, it might seem like 1-800-Flowers is serving a real niche market, but its business is faring amazingly well in terms of its finances.
As of Q2 2021 (ended Dec. 27), 1-800-Flowers managed to grow its revenue and net income by 45% and 53%, respectively, to $877.3 million and $113.7 million. Even though it is wildly profitable, the company is only trading for one time revenue and eight times earnings.
That might be hard to believe, as the average e-commerce company has a valuation of 4.5 times sales and 133.7 times earnings. One reason behind this discrepancy is that the custom of giving flowers and gifts isn't a highly frequent or regular occurrence for many consumers. Because of this, 1-800-Flowers is also expanding its business into other areas to grow its revenue, such as developing business solutions for local florists.
The business may sound too out-of-the-box for some, but given its cheap valuations, the risks of the investment not working are already priced into the stock. If you are looking to invest in e-commerce stocks right now, give flower power a chance.