Penny stocks are shares that sell for just pennies. Sometimes that means quite a few pennies – but still less than a pound. I’ve been hunting for UK penny stocks lately.
Here are a couple of UK penny stocks I would consider buying for my portfolio.
Reopening shares with momentum
With the UK emerging from lockdown, a lot of focus has shifted to so-called reopening shares. From pub chains to retailers, these are businesses that could see a revenue boost from reopening.
One such share is cinema chain operator Cineworld (LSE: CINE).
Despite its strong presence in the UK, three-quarters of the company’s business actually comes from the US. Reopening there is ahead of the UK for the most part. Many American cinemas opened their doors to patrons again at the start of this month. UK screens are slated to open again from 17 May.
With its shares up 65% over the past year, clearly a lot of investors are already anticipating a possible reopening benefit for Cineworld. Indeed, some caution that the recovery prospects may already be factored into the Cineworld share price. But at 96p, I wonder whether these UK penny stocks have fully factored in the potential benefits.
Cineworld share price risks
Certainly there are risks. The company has a net debt of approximately £3.2bn. Given its market cap is only £1.3bn, servicing that debt will likely reduce earnings for many years.
Additionally, we don’t know how keen people will be to return to cinemas. Recent experience in China and Australia is promising. But they have had very different pandemic experiences compared to Cineworld’s main markets in the US and UK.
If there is further positive momentum towards reopening shares in coming months, I think Cineworld could be one of the beneficiaries. That is why I would consider picking it for my portfolio.
Blue chip among UK penny stocks
Cineworld is a well-known name on UK high streets.
Another iconic brand among UK penny stocks is high street bank Lloyds (LSE: LLOY). At 42p the Lloyds share price sits far below those of peers such as Natwest and Barclays.
Partly I think that is explained by its history. The company was badly bruised by the financial crisis. It has spent over a decade essentially in recovery mode.
It is also partly explained by current uncertainty. Slow economic recovery or a weakening housing market would both pose risks to profitability. Its UK focus could be a strength if the UK performs well. But such concentration can increase risks, by tying the Lloyds share price so closely to the fortunes of one economy.
My action plan for Lloyds
Despite these risks, ought Lloyds to rank amongst the number of UK penny stocks?
I am upbeat on the prospects for the Lloyds share price. The pandemic hurt profits but the bank still turned in a full-year profit last year. It has reinstated its dividend. Excess capital suggests that future shareholder returns could receive a boost, perhaps through a special dividend or share buyback.
Overall I am fairly optimistic about the outlook for UK economic recovery. Part of my reason to invest in Lloyds is as a proxy for that investment thesis.
For those reasons, I will continue to hold Lloyds.