Motley Fool Hidden Gems Investing - Are psychedelics investable?

Episode Date: April 13, 2022

Earnings season is here, and JPMorgan Chase is offering some “pessimistic optimism.” (00:22) Deidre Woollard and Jason Moser discuss: - How rising interest rates may affect mortgage lenders. - PayPal’s CFO moving to Walmart. - A rebound for Delta Airlines.   Running a double-blind study isn’t easy. It’s even tougher when the drug being tested is a psychedelic. (13:45) Emily Flippen and Meilin Quinn discuss the regulatory challenges psychedelic companies are facing, and if investors should jump into this growing trend. Stocks mentioned: DAL, WFC, JPM, PYPL, WMT, JNJ, CMPS, JAZZ, MNMD   Link: 6 Psychedelic Stocks to Consider in 2022 | The Motley Fool Host: Deidre Woollard Guests: Jason Moser, Emily Flippen, Meilin Quinn Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Deidre Willard, sitting in for Chris Hill, and I'm joined by Motley Fool Senior Analyst, Jason Moser. Today, we're looking at JPMorgan Chase earnings, Walmart's new CFO, and a surprising shortage. Hi, Jason, great to be with you today. Hey, Deidre, thanks so much for having me. Well, I think you're the perfect person to have on today because we've got a couple of interesting financial stories. Let's start with the biggie. We've got these financial earnings from JPMorgan Chase. Interesting quarter. Earnings came in at $2.63 a share, revenue of $31.59 billion. The company took a $902 million charge down and saw $524 million in losses related to

the Russia-Ukraine conflict. And it seems like CEO Jamie Dimon, he's striking this note of pessimistic optimism. He says he's optimistic for the short term, but mentioned a lot about geopolitical and economic challenges that are really sort of concerning him and the company going forward. Starting to see rising interest rates already have an impact on those mortgage origination numbers, which is important to JPMorgan Chase. What are you thinking about interest rates and could they be a drag on earnings going forward? Yeah, I mean, it definitely feels like it's a pretty safe assumption that rates going forward are headed ultimately in one direction, right? Up. And now I think the timing certainly could

be up for debate given the current environment and how the Fed ultimately decides to play this out. But I mean, I do think it's fair. You have to expect that the mortgage origination business will likely pay, it'll play a smaller role in JP Morgan's business. But I do also think it's important for investors to note that, you know, JP Morgan isn't, they're not heavily exposed to mortgage market. They do their fair share, but when you actually look at the numbers, it's not crucial to the business. Now, mortgage originations dropped 37% from a year ago, and home lending revenue was down 20% as well over that same time period, so it's noteworthy. But when you're looking at a business that's generating somewhere in the neighborhood of

$1 billion this most recent quarter in home lending revenue, in the context of $30 billion in revenue. It's obviously not something that is going to dictate the success or failure of the business, but it's absolutely something to keep an eye on. For me, I think it's going to be a little bit more interesting to see how this mortgage market is impacting Wells Fargo, for example, when we see Wells Fargo announced a little bit later, because Wells is absolutely more exposed to that home lending business, but definitely something to keep an eye on. Yeah, that is absolutely a really good point. Well, let's talk about another part of the business, which is debit and credit card. That was a little more positive. Sales volume going up, increase in travel, dining were all going out a little bit more. But we've also got inflation hitting these new levels. What do you think is going to happen on that aspect of the business? Yeah, it is nice to see that spending on the debit and credit side. I think that

we should continue to see that perform. But you mentioned inflation, and I think that's something that's going to impact to an extent. I will say, just anecdotally, my family and I, we were on vacation these last 10 days, we went to France, and it was interesting to see, just going from the States over to Europe there, from the airport here in DC to the airport there in France and everywhere in between, it was really busy. There were a lot of people out, there were a lot of people happy to be doing things, and it felt like there were a lot of people that were spending. I know that we were. I think part of that probably is a little bit of pent-up demand. When you make that plan to go somewhere, then you ultimately

get there, you can start rationalizing your spending a bit more in the moment. You're happy to be there, you know that your time there is limited. Maybe there's some perspective there from the last couple of years that you didn't have before. Time isn't unlimited. That probably plays into it a little bit. I do feel like spending should continue to be fairly robust, even given the inflationary environment. If you look at some of these data points, I just thought it was noteworthy earlier this morning too, we saw Delta talking about ramping up its schedule as peak travel season approaches. They're talking about flying 84% of its 2019 capacity levels this quarter. That's in the face of these higher fuel prices and other costs that are going into

operating these airliners. Domestic U.S. airfare rose 20% last month compared with 2019 based on Adobe data. That tells you that even in the face of these rising costs, it feels like consumers are really excited to travel and spend. Then finally, I think it's also worth remembering that over the last couple of years, consumers were really able to de-lever with all of the stimulus that's been pumped through the economy. We saw those abnormally high savings rates, a lot of that savings went to paying down a lot of that consumer debt. On the one hand, it probably should be seen as an opportunity for consumers to maybe keep some of those personal debt levels low. It's nice to pay off debt, it feels really good. But we also know that consumers

aren't necessarily always so rational, particularly given that we've been so limited in what we've been able to do over the past couple of years. It really does feel like, even with the inflationary environment, consumers seem to be excited to be able to get back out there and spend some money. Yeah, absolutely. Pent-up demand is a huge factor. One more thing I want to talk about with Jamie Dimon, he's kind of a bellwether in the industry. And this note he struck of sort of preparing the company and I think the market for a little bit of choppiness ahead. What did you think of some of the early remarks and kind of what he's saying about being optimistic, but not robustly so. Yeah. I mean, I liked your description there and sort of

pessimistic optimism or however you want to phrase it really. To me, I mean, I think he struck the right tone. I think one of the things that I like about Jamie Dimon, he's a pretty level-headed guy. He's not just some eternal pie-in-the-sky optimist, right? He's a bit more of a realist, but I think he is also able to separate near-term and long-term. And so I think that's something really to keep in mind, is that while we are in a period of a lot of uncertainty, you've got inflation, geopolitical concerns, supply chain issues, rising interest rate environment. He clearly sees challenges here in the near term, but he does seem to also strike a little bit of optimism for the longer term there. I think you mentioned earlier that $902

million charge they took in reserves there. That's something I think always to keep an eye on with banks, particularly as we've seen over the last couple of years. We saw a lot of those reserves released and that served as a little bit of a catalyst for those bank earnings here. It's interesting to see how the push and pull between reserving close to another billion dollars because of those near-term concerns, yet the board also authorizing a new $30 billion share repurchase plan. So, they can execute that plan really as they see fit going forward, which I think speaks more towards his long-term optimism while also recognizing the short-term concerns. Yeah, absolutely. So, let's move

on to another story. Jason, you're kind of famous around the company for talking about the war on cash. So, I want to chat with you today about the news that PayPal's Chief Financial officer is moving over to Walmart. So John Rainey, he's going to replace the current CFO at Walmart, Brent Biggs, who announced last year he's stepping down. So thinking in general about a CFO role, how important is that if you're Walmart? What's his sort of domain at Walmart? So I feel like with Walmart in particular, this is a role that it's a bit more important than maybe others. I think that while Mr. Rainey's been with PayPal, I think for six or seven years, the role at Walmart looks like it might be geared a little bit more

towards building something. If you look at the description, what they expect from the CFO there, it's not just making sure the finances are in order and minimizing your tax bill. seems like that CFO is playing a bit more of a hands-on role there as they try to deliver new digital technology and ultimately financial initiatives. This is a business in Walmart that has successfully made this transition just from being this bricks and mortar retailer to really becoming an omnichannel retailer that is going beyond just retail. I could see where the CFO in this case, it's a step up for them. Walmart is a big company, very important company in the retail tailspace globally. Maybe he feels like he has the opportunity to take on new challenges and

build something that he didn't necessarily have that opportunity at PayPal. It's always something to note when you see executives like that leave, but you also want to understand why they're leaving. It feels to me like he's leaving for the right reasons and perhaps leaving to take on some new challenges that he wasn't going to find otherwise. Yeah, I think it's interesting. You keyed in on the same word that I did, which was omni-channel. That was in his quote on the press release. I think that's really interesting. Walmart, they've done a little bit of foraying into the metaverse. They've certainly changed a lot of their push away from physical stores. They're changing some of the size of physical stores. They're experimenting with a lot of different things. Is that an area that you think he's going to be focused in more on the technology side as well as the logistics side? I think so.

I mean, I think coming from his background with PayPal, which is clearly in that fintech space, right, marrying the financial sector with technology, I think that Walmart's going to benefit from his experience and his expertise there as they continue to build out all of those sort of newfangled tech-style offerings, right? I mean, you've got an advertising business, a metaverse business, I mean, they want to be more in control of the payments business, and this is all to go along with that retail business. And I think, ultimately, for Walmart, that's a wise move, right? I mean, Omnichannel ultimately is just being where and when your consumers want you to be. And that is something that I don't

think is optional in today's retail environment. I mean, we're seeing businesses like Home Depot making these same investment lows. They continue to witness tremendous success from these investments in Walmart as well. I think you'll continue to see them double down on these types of omnichannel investments. It sounds like a really neat opportunity for Mr. Rainey. Interesting, too, because as much as you've got the metaverse and technology, you've also got physical goods. Walmart is still in the business of moving things around, getting things to stores. I mean, I've never gone into a Walmart that I don't see them moving giant packages around. So they made news last week they're paying long-haul truckers $110,000.

That sort of captured the imagination of the media, certainly. But it does indicate that there's a challenge for Walmart with labor and having to balance its sort of company mission, saving the consumer money, being that low-cost option. On the other hand, they're having to pay for more labor. they're having to pay for increased commodity costs. Do you think that's also going to be something that Mr. Rainey is going to have to wrestle with? Yeah, I mean, he definitely will. I mean, getting things from point A to point B ultimately is their business, right? And that's challenging. Logistics and fulfillment, that's difficult stuff. And clearly, it's not a Walmart specific problem. But I do think from sort of the opportunity perspective, I think this does speak

to the advantage of scale here. Being seen as, again, this customer that can ultimately meet the customer's needs as often as possible, that creates loyalty, it creates repeat sales, it grows brand equity, and it makes those near-term investments like the ones they're making with trucking, it makes those investments, you could justify those investments a little bit more easily because you can paint that picture of how they will pay off in the long-term. So, I definitely understand why they're doing it. Again, not a Walmart-specific problem. I definitely understand why they have to do it, though. Yeah, absolutely. Well, thank you so much for your time today, Jason. Hey, thanks a lot for having me.

We've got a fascinating segment coming up next about investing in psychedelics for mental health. This just brings up all kinds of interesting questions, like how you run a double-blind study when you're testing a psychedelic. Emily Flippen and Malin Quinn are going to dive into this growing trend and what it could mean for investors. Hi, Fools. My name is Emily Flippen and I'm joined by Malin Quinn. We're going to be talking about the business of psychedelics today. It's certainly getting a lot of headlines, a lot of investors interested in the space. Malin, what can you tell us about what it means to be an investor in this industry? Yeah. So people are pretty hyped about psychedelics. People are hearing about it

from friends about their life-changing psychedelic trips. They're hearing about it from people on Twitter, from podcasts. I mean, there's even a Netflix show. It's called The Midnight Gospel. And half of the episodes are about the use of psychedelics for mindfulness. This really plays into a broader trend of people prioritizing their mental wellness. meditation apps are taking off. We're seeing that there's less stigma about going to therapy. And with that, more and more people are talking about the potential benefits of psychedelics as a way to confront their demons, whether that be depression, anxiety, existential dread, eating disorders, trauma, etc. And then, of course, there are billionaires like Peter Thiel

pouring money into this space. And there's that class of investors that get super hyped about anything Peter Thiel touches. With this, there are more than 80 companies right now researching psychedelics, developing or administering psychedelic compounds. This is according to Crunchbase. And a chunk of these are public companies. So to name a few, there's Compass Pathways, there's Atai Life Sciences, there's MindMed, there's Cybin. So we talk about the psychedelics industry. What we're talking about are drugs that are illegal on the federal level, at least here in the U.S. So when you think about money coming to the space, where is it going? Yeah, this money is going into

many biotech companies that are in the process of clinical trials. One example, I think, is one of the more talked about psychedelic companies. It's exploring the use of psilocybin, which is the active ingredient in magic mushrooms. It's called Compass Pathways. So they've actually received a breakthrough therapy designation from the FDA. And this has fast-tracked some of its trials for its psilocybin-based treatment for depression. So, hey, right now, the FDA, it doesn't actually seem too close-minded to research on the substance. In fact, legislation looks to be moving in a semi-encouraging direction, and legislation and regulatory approval is what's going to be really crucial to the success of this industry and to the widespread adoption of psychedelics for therapy. So I've heard this story before. I'm an investor in the cannabis space myself,

and you'll see a lot of people compare the psychedelics industry to the cannabis industry. And they certainly do have their similarities. Like you mentioned, there are a lot of research on both cannabis as well as different psychedelics, which is a class of drugs, hallucinogens, coming out, supporting their medicinal uses, despite the fact that it is really still under-researched. But it's also an industry that is filled with hype. And I think you can expect that similar boom-bust cycle that we saw with cannabis, especially when Canada moved towards legalization. So, if you are investing in the space, I say, prepare yourself for the ups and downs that will come with a lot of these stocks as a result of

interest from retail traders. But as you mentioned, this is also going to be and is a really highly regulated industry. And as we've seen at the cannabis space, governments are slow to adopt change. Most psychedelics are Schedule I drugs, which means that these pharmaceuticals are approved with only extreme regulations. They have very limited distribution because of their high chance for abuse. When you compare that to what we experience in the cannabis industry, this is where those differences come in. You can look at GW Pharma. They were one of the first companies to get a CBD-based treatment for rare forms of epilepsy and their drug Epidiolex. It had unprecedented approval because CBD, as part of the cannabis plant, was a Schedule I substance

at the time. It, the Epidiolex drug, was descheduled because of its decreased risk for abuse. It was CBD-based. Nobody was going to experience a mind-altering event as a result of using this drug. So when we talk about that difference between the cannabis treatments, especially CBD, versus these hallucinogens, is that they're a mind-altering nature. And that is going to mean that I think it's probably less likely that we'll see the federal government come in and be very loose with the regulations, given the high chance for abuse with a lot of these drugs. So, it's important that you come in with the expectation that this probably, in my opinion, isn't going to be the next Epidiolex, where we see a Schedule I substance as an active ingredient in a drug have wide use cases. I expect that the drugs that do eventually get approved will be very, I guess, limited in terms of their distribution and use cases, at least until we see actual regulatory change on part

of the federal government. Yeah, totally. But you know what? There actually is an example of Johnson & Johnson and Janssen. They have a ketamine-based drug that was approved to treat depression in 2019. It's called Spravato. And ketamine isn't technically a psychedelic. But this approval, as did in some ways that CBD, the strides in the cannabis and CBD space, likely gave credibility or started to give credibility to the idea of using an illegal Schedule 1 drug to treat mental illness. So perhaps we can see it panning out so that J&J walked so companies like Compass Pathways could run. That is true, but I think it's worth clarifying, and this is where the nuances of investing in the

psychedelics industry comes in, because not all psychedelics are made the same, unlike the cannabis industry, where you're really only looking at THC and CBD. That's where ketamine is a Schedule 3 substance, not a Schedule 1 substance. The government has made the determination that ketamine, at least on some level, according to the government, is more safe, less likely for abuse than a Schedule 1 substance, which does include psilocybin, as you just mentioned, or LSD, those sorts of, I guess, drugs. I think investors should be cautious in terms of their expectation for regulatory change. I say this fully aware of the fact that I could be wrong, but having covered the cannabis industry for so long and seeing the government go back and forth on how

to regulate the space on something as simple as CBD, which has no mind-altering properties, I guess it doesn't build up trust in my ability for the government to act quickly when it comes to psychedelics. There are some other reasons to be skeptical of this emerging industry. There have been studies, there's been preliminary research from Johns Hopkins, NYU, UCLA, that's showing psilocybin to be a potentially effective treatment for depression, for anxiety. Johns Hopkins found that 80% of patients in its study continued to show significant decreases in depression and anxiety six months after being treated with psilocybin. One problem is that it's hard to hold a truly double-blind clinical trial with a

psychedelic drug because chances are the patients who received psilocybin versus the placebo, Patients who receive the 10 milligrams of psilocybin, as is the case with Compass Pathways trial, they likely know that they received the active drug. They know they didn't get the placebo. So the question is, have patients actually been seeing the therapeutic benefits from these treatments, or do they think they are because they know that they had received an active drug? And then, of course, another struggle might just be monetizing this therapy.

You can't patent the compounds of psilocybin itself. You can't patent nature. These compounds exist in nature, and that's not something that you can patent. Compass Pathways was able to patent its crystalline formation of psilocybin. So they rearranged the molecules to get a synthetic version of psilocybin. But what you're seeing with Compass Pathways is they're doing a patent land grab. They're trying to patent the dim lighting in the therapy room, the holding of the therapists and patients holding hands, the playing of soft music during the treatment. Compass will likely charge therapists for the certifications in its therapy protocol and try to monetize that aspect.

But should some of these companies get FDA approval for their psychedelic treatments, it'll be interesting to see how they commercialize and monetize these products when psilocybin and psychedelics already exist in their natural form in nature. I'm really excited to see where this industry goes. I want to end off with a question here to you. I'll answer it myself as well, which is to say, are you excited to be investing in this industry now? In my own perspectives, I say no. It's certainly an interesting industry, one that I think investors should keep an eye on, but it's going to take such a long time horizon, I think, before you see anything really monetizable come out of the space, that in my opinion, it's probably better to sit on the sidelines, especially given the hype. But I will say, I do think there is a medical market for these treatments, especially given the positive research we've seen so far. If you believe that the recreational market is going to eat

the medical market, I would challenge that belief because I do believe there are people who do not consume recreationally psychedelics that would consume them medically if approved. So I think the market's there. I think it'll just take so much time that I'm not interested. But Malin, what do you think? You know, I'm pretty interested and excited to follow what kind of research and innovation is happening in this space, just from the anecdotes that I've heard in popular culture and from people I know about how psychedelics have brought them out of very dark mind spaces. But yes, I agree. There still remain a lot of uncertainties. There's quite a lot of hype. And we've seen with the cannabis industry that hype isn't always productive. That wound up being

a bubble. I don't know if I'd necessarily see this industry being a bubble, but still take a step back and be mindful of these uncertainties. Well, we'll certainly be keeping our eye on the industry. Mei-Lin, thank you so much for joining me and providing your expertise. Thanks, Emily. That was fun. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.

We'll be right back.