MGC Pharmaceuticals Ltd (LON:MXC) shares, fresh from their London debut, have been caught up in a Reddit-led rush into cannabis-focused companies.


Looking for their next stocks to buy after lighting fires under GameStop Corp (NYSE:GME) and AMC Entertainment (NYSE:AMC) in recent weeks, retail investors who read Reddit’s WallStreetBets and use RobinHood and other trading apps seem to have got hip to the momentum in the sector and began piling in overnight.


READ: MGC Pharmaceuticals raises GBP6.5mln and joins London’s growing cannabis sector


On the London Stock Exchange, shares in MGC were up more than 50% in morning trading on Thursday, while the Medical Cannabis and Wellness UCITS ETF (LON:CBDP) was up 5%.


North American giant Tilray Inc (NASDAQ:TLRY), which recently agreed a deal for Grow Group Plc‘s Grow Pharma arm to import and distribute its medical cannabis products in the UK, was the biggest riser overnight, up almost 51%.


Others in the rally included Aurora Cannabis Inc (NYSE:ACB) and Namaste Technologies Inc (CVE:N), which both leapt more than 21%; Cronos Group Inc (NASDAQ:CRON) jumped 14%; Village Farms International Inc (TSE:VFF) and Delta 9 Cannabis Inc (TSE:DN) were both up 10%; Charlotte’s Web Holdings (TSE:CWEB), Heritage Cannabis Holdings Corp (CNSX:CANN) and Valens Company Inc (TSE:VLNS) were all up 8%; with Canopy Growth Corp (NASDAQ:CGC) 6% and Australis Capital Inc (CNSX:AUSA) up 2%.


Several sparks have lit up the sector in recent weeks, including the agreed US$7.2bn takeover of Anglo-US group GW Pharmaceuticals plc (NASDAQ:GWPH) by Jazz Pharmaceuticals PLC (NASDAQ:JAZZ), the planned merger between Tilray and Aphria and Canopy Growth’s strong earnings this week.


READ: Cannabis trade ‘running full steam ahead’ with Biden inauguration and UK IPO pipeline


Shares in the US cannabis sector have been getting higher even since it looked like Joe Biden would win last year’s presidential election and momentum grew stronger last month as the Democrats won a majority in both upper and lower houses of the Capitol.


Multiple cannabis bills are expected to be tabled soon at the federal and the state level as pandemic-hit government coffers need topping up.


“Expected legalisation in the US is fuelling the speculation in these names, with Democrats planning to end prohibition at a Federal level, which would be a clear tailwind for the sector,” said market analyst Neil Wilson at Markets.com.


However, Wilson said the US stocks were “running up way beyond what the current path to legalisation will mean with regards earnings” and he said valuations “are looking extremely stretched, albeit we are not anywhere near levels seen during the cannabis bubble of 2018”.


Like with GameStop, some cannabis stocks have been targets of Wall Street short sellers.


Tilray, for example, has almost a quarter of its shares sold short, which led to its shares making outsized gains as short-sellers were forced to cover their positions.


“Cannabis companies are the latest stocks on Reddit’s radar and that’s driving many in the sector beyond any justified valuations. Investors need to be aware of those stocks that are totally disconnected from their fundamentals,” said Hussein Sayed, chief market strategist at FXTM.


“Investors are getting high on pot stocks, but just like GME the comedown may be harsh,” punned Wilson.


“It’s another example of the excess, the frothiness and speculation that is running through corners of the market right now. We perhaps should be a little concerned about a ‘locust effect’, with stocks and sectors being pumped and dumped at will before the crowd moves on their next target.”


Fundamental attractions


However, outside of the potential short-term nature of Reddit investor’s interest, there are fundamental reasons for investors to take a more serious look at the sector, such as the potential changes from the Biden administration.


Across the Atlantic, significant changes to legislation and financial regulation have been made to open up the UK market to potential growers, retailers and end users.


Medicines derived from cannabis were made legal in 2018 and the Financial Conduct Authority last year confirmed that UK-based medicinal cannabis companies can list their shares publicly.


Cannabis patient numbers in the UK are rising at slow pace but Nawan Butt, portfolio manager of the Medical Cannabis and Wellness UCITS ETF said the Project 2021 initiative should provide more traction as it builds a body of evidence around the effectiveness and tolerability of medical cannabis and should make both physicians and patients more comfortable with cannabis as a mainstream rather than fringe treatment.


With Sativa Wellnesss Group Inc also listed on the Aquis exchange, there is a queue of cannabis-related companies that are thought to be planning to list on London’s main market and AIM junior market in coming weeks and months, including Cellular Goods, a consumer CBD brands business that is understood to be backed by David Beckham’s DB Ventures; the abovementioned Grow Group Plc, which has also started trials to extract cannabis-based medical products in the UK; Northern Leaf, which is looking to lead the development of a new pharmaceutical -grade hemp cultivation industry on the isle of Jersey; and South West Brands, which says it is aiming to “launch The Hut Group of cannabis”, helped by a recent investment by FastForward Innovations Ltd (LON:FFWD).

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