Drone stocks are surging on Wall Street, led by Red Cat Holdings

Drone stocks rallied Monday as retail interest ramped up in the sector following a Palantir partnership with Red Cat Holdings and amid a flurry of mysterious sightings in New Jersey and other Northeast states that Wall Street believes could boost funding for the industry.

Red Cat shares rallied 27% on news that it’s working with Palantir to integrate visual navigation software into its drones. The ticker RCAT has been the sixth-most-popular mention on Reddit’s famed WallStreetBets page over the last 24 hours, behind only crypto play MicroStrategy, Nvidia, Tesla, Palantir and SPY (SPDR S&P 500 ETF Trust), according to data tracking firm Quiver Quantitative. RCAT’s popularity on WSB has surged more than 1,625% in the past 24 hours, the firm said.

Donald Trump Jr.-affiliated Unusual Machines was another big winner Monday, surging about 16%. Kratos Defense and Security Solutions added about 5%. Aerovironment gained 8%.

The partnership news comes as recent sightings across the Northeast have reignited interest in the sector, while also fueling national security concerns. FBI officials on Thursday said there was “no evidence” that the drones jeopardize “national security and public safety.” Officials also said Saturday that many of the sightings are “manned aircraft being misidentified as drones.”

Many on Wall Street view the incoming White House administration as a potential boon that could boost funding for the sector and U.S.-made drones. Tesla CEO Elon Musk has spoken favorably of drone technology and is poised to play an influential role in President-elect Donald Trump’s White House.

“On the drone protection side, federal government counter-drone technologies are increasingly being used by local and state law enforcement to protect stadiums, airports, prisons, and other public settings,” said William Blair analyst Louie DiPalma in a note to clients. “This will likely result in a surge in counter-drone investments by local and state government agencies over the next decade.”

Investors have also come to view ties to the sector through Trump Jr.’s connection to Unusual Machines as another potential tailwind for the industry. The eldest son of the president-elect joined the advisory board of the company in November.

Congress has also taken interest in the sector. The National Defense Bill, recently passed in the House, is also drawing interest. If the bill is passed by the Senate and signed into law, China-based DJI would be barred from selling new drones to the U.S.

— CNBC’s Yun Li contributed reporting.