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The MXC share price has soared 200% in just one week! Should I buy now?

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Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.
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As a risk-tolerant active investor, I’m always on the lookout for promising small-cap stocks hitting the UK market. One that’s caught my eye over the last few days — thanks to its incredible performance since listing — has been MGC Pharmaceuticals (LSE: MXC)

What is MGC Pharma?

MGC describes itself as a bio-pharma company “specialising in the production and development of phytocannabinoid-derived medicines.” In short, a medicinal cannabis business.

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The company is focused on three areas: Neurology, Oncology, and Autoimmune diseases. It has two flagship products: CannEpil for refractory epilepsy; and CogniCann for improving the quality of life for Alzheimer’s patients. Interestingly, it’s also developing a product for treating Covid-19-infected patients (ArtemiC)

Last week, MGC became the first company in this very niche sector to IPO in London. That’s not to say this is the minnow’s first foray into the market. It’s actually been listed on the Australian stock exchange since 2016. 

IPO result?

So how did the IPO go? Very well. MGC’s entry into the UK market followed an oversubscribed £6.5m capital raise with institutional funds and professional investors at 1.475p per share. By yesterday, the  shares were changing hands for 4.52p, a rise of over 200% from the offer price. A quite spectacular result!

The cash raised will be spent in three ways. A good portion will pay for the company’s priority clinical trials of its leading products and improve MGC’s distribution network. The remainder will be used to assist with the construction of manufacturing facilities in Malta.

Next move for MXC?

So where next for the MXC share price? Over the very short term, it’s impossible to say where the MXC share price will go. That’s not to say we can’t speculate.

There’s certainly a chance the valuation could climb even higher as word spreads and hype grows. The huge Reddit forum-fuelled spike seen in overseas cannabis stocks, such as Canadian pharmaceutical and cannabis company Tilray, could further stoke interest among traders looking for speculative small-cap plays.

Attention on this part of the market is likely to increase further if President Biden gives his approval for the federal legalisation of the cannabis industry in the US. Based on this and the early success of MGC, more cannabis-related listings on the London market could be on the cards.

However, there are a few things I’m bearing in mind.

Buyer beware

First, it’s likely that some early holders will be looking to bank some profit. As a result, it seems reasonable to expect some volatility over the next few weeks. In fact, the MXC share price has already tumbled 7% in early trading today, highlighting the importance of being diversified elsewhere.

Second, the bio-pharma space isn’t known for its predictability. Moreover, medical applications of cannabis are still very much in their infancy and setbacks are inevitable. The goal of helping people manage pain is clearly admirable, but the complex scientific and regulatory hurdles ahead shouldn’t be underestimated.

Third, MGC’s current valuation must be seen in perspective. The firm achieved just AU$2.1m in revenue in the last financial year. That’s worth bearing in mind considering its market capitalisation passed £100m last week.

The performance of the MXC share price further evidence small-cap stocks have the potential to offer outsize investment returns to skilled private investors. Even so, I’m comfortable sitting on the sidelines for now.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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