2 penny stocks to buy in July

Jonathan Smith reviews two popular penny stocks that he think have legs to move higher this summer as the UK economy reopens.

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Penny stocks are companies that have a share price below £1. Some investors can get confused in thinking that penny stocks are all weak investments. This isn’t the case, and although some penny stocks have a smaller market capitalisation than larger firms, there isn’t anything wrong with me investing in them. The caveat is that I need to have done my research first, before deciding whether to buy or not. Here are two penny stocks that I like currently.

Anything to watch?

Cineworld (LSE:CINE) has a share price of 83p, making it a penny stock. Yet the company is well established, having 767 sites spread over 10 countries.

The company wasn’t classified as a penny stock until the stock market crash of March 2020. The impact of the pandemic saw investors selling Cineworld shares. From starting the year around 220p, the share price finished March around 40p. 

For much of last year, I was bearish on Cineworld shares. The uncertainty of lockdowns coupled with no vaccine meant that cinema sites stayed shut for most of the time. Even if they were open, I really doubt people would have felt comfortable visiting them anyway.

However, going into July and H2, I think the picture has changed. Most cinema sites are back open, with several blockbuster films due to be released shortly into cinemas only. The progress of vaccine rollouts, particularly in the UK and US, should aid confidence in people wanting to go out to see a movie.

Another reason I think this penny stock is appealing is that the share price trades at a significant discount to previous years. Even with the loss from 2020, the company still has net assets of $226m. There is value within the real estate and other parts of Cineworld, that I don’t think the share price currently accurately reflects.

The risk is that people have changed their preferences for film watching over the pandemic. If streaming is the new way, then the age of the cinema could be over. When I consider the high levels of debt that Cineworld has taken on, if future demand is low then this could be a cocktail of financial trouble.

An unlikely penny stock

A second penny stock I’d buy is Lloyds Banking Group (LSE: LLOY). It feels odd to include the banking stalwart as a penny stock, but with a share price of 47p, it’s just that.

It’s traded as a penny stock for over a decade since the financial crisis. It was further hit by the crash last year. Concern about the potential for impairment charges and bad debt was paramount last summer. Thankfully, the impact of the pandemic wasn’t as hard as expected in this regard. So although profit dropped by 70%, it still posted a pre-tax profit of £1.2bn.

Looking forward, I think the outlook is brighter into H2. Economic indicators including retail sales are surging higher. This activity should help the business to perform due to higher payments and loans. Further, the Bank of England might raise interest rates soon to counter higher inflation, something that would help boost the interest margin for Lloyds.

A risk will be that Lloyds is still some way behind competitors with digital capabilities. It’s continuing to close physical stores, but until the digital platforms can rival others, it may struggle to retain customers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 does not have any position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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