Penny stocks are ones that trade in pence not pounds. That doesn’t necessarily mean they are shares in small companies. In fact, some have market capitalisations of billions of pounds. But for whatever reason, their share price is languishing below a pound. Here are two UK penny stocks I would consider buying for my portfolio today.
Hit the road
The bus company Stagecoach (LSE: SGC) has continued to fall lately. It now sits around 65p, which means it has lost almost 40% of its value since April. Over the past year, the company has put on 22%. But the recent fall suggests that investor enthusiasm has been running out of road.
A move to mixed working could risk commuter revenue falling compared to historical levels. Another risk in the short-term is further lockdowns in the UK cutting demand for bus travel.
However, I remain upbeat about the outlook for Stagecoach. There is limited competition in the UK bus market, which puts Stagecoach in a strong position. It has deep expertise of the bus and coach market, allowing it to understand demand and market dynamics well.
Getting out of the train business has freed Stagecoach up to focus on its strengths. I see the recent fall in the Stagecoach share price as a buying opportunity. It is high on my list of penny stocks to buy for my portfolio in July.
Penny stocks to buy: Lloyds
The high street bank Lloyds (LSE: LLOY) has been falling since the beginning of last month. It’s still deep in penny share territory.
But over the past year, the shares have added 43%. I’m hoping that the recent fall is simply a brief interlude and the shares start to climb again before too long. The reason I think that might happen is that there has been a lot of good news for shareholders in recent months. Regulatory restrictions on dividends have been lifted. Lloyds has previously indicated it plans to return to a progressive dividend policy.
Additionally, concerns which plagued the banking sector last year have diminished. Feared high default rates didn’t materialise, and Lloyds like competitors was able to reverse some provisions it had booked against possible bad loans. Meanwhile, although the UK economic recovery is unpredictable, the outlook has improved markedly over recent months. As Lloyds is heavily exposed to the UK economy, I see that as positive for the Lloyds share price.
The Lloyds share price in the pennies
But if Lloyds is attractive, why does it trade as a penny share?
I think there are a number of reasons for that. While the dividend has been reinstated, its suspension last year made the bank less attractive to some investors.
More fundamental is the recollection many investors have of the last financial crisis. It was at that point that Lloyds became a penny share, a status it has not shaken off since. There is the risk that another financial crisis could weaken banks such as Lloyds again. But I think many lessons have been learned since then. Lloyds’ capital structure today looks more robust to me than it did in 2008. With its strong entrenched position in UK banking, I include it among my penny stocks to buy.
