Penny stocks are shares that trade with a price in pence not pounds.
With the economy getting back into gear, I have been looking for what I call “Concorde penny shares”. Those are I think could break through the pound barrier.
Here are two companies in the same sector I expect to benefit from the likely travel boom as domestic travel restrictions increasingly become a thing of the past.
Recovery potential
Shares in bus operator Stagecoach (LSE: SGC) fell today. The market digested news that its founders planned to sell down much of their stake.
However, I think the reaction was overdone. The pair have been involved in the business for four decades. They plan to sell their shares gradually over the coming 10 years. Sir Brian Souter retains a seat on the board. So the sale doesn’t look like it reflects a lack of confidence in the company’s prospects.
I hold these penny stocks in my portfolio. The reason I see potential here is that I expect bus usage to return close to pre-pandemic levels, although it may take some years. For now, the company continues to benefit from government financial support.
Stagecoach has a well-known brand and an effective monopoly on many travel routes. That equates to pricing power, which should allow it to maintain profit margins in future.
Sectoral shifts
I also see a broader shift which could benefit Stagecoach and other bus operators. The government has announced a new national bus strategy. The details will take time to have impact in practice. However, I think that the strategy is a sign that there is political will to help the bus industry start growing again after decades of falling passenger numbers.
However, one risk with the strategy is that it could implement the sort of price caps seen in the old regulated bus industry. That might be good for passengers. But it could be bad for Stagecoach profitability.
Penny stocks on the rebound
The same applies to one of Stagecoach’s main competitors, FirstGroup (LSE: FGP).
FirstGroup has had other problems, though. Specifically, its troubled North American division has been a weight around its neck over recent years. Indeed last year it even announced concerns about its ability to remain as a going concern.
Since then the business prospects have improved, in my view. The company recently announced that it plans to sell its large school bus operation in the US. The mooted price is £3.3bn. That will be a welcome boost to the company’s balance sheet. It will allow management to focus on the UK.
FirstGroup shares are already up 24% over the past year. However I continue to see potential upside in these penny stocks. It should benefit from similar factors as Stagecoach in the UK. Its UK rail franchises should also start to see improving passenger numbers. That might help the company return to more normal levels of profitability.
However, further lockdowns could damage revenue and profits at both companies. FirstGroup also has the risk of whether the US sale completes. If for any reason it does not, the company’s debt pile will continue to be a risk for shareholders.