Penny stocks trade in pence rather than pounds. While some have doubtful prospects, other UK penny shares are in well-known companies with proven business models.
Here are two UK penny shares I already hold and would consider adding more of to my portfolio
Shares cheaper than a bus ticket
Speculation about a bid for Stagecoach (LSE: SGC) from its rival National Express has provided a fillip to the Stagecoach share price this week. The bus operator has been a lucrative investment over the past year, with its shares moving up 122%. Despite that, Stagecoach still sits among the ranks of UK penny shares.
If a bid emerges for Stagecoach, or other potential suitors throw their hats in the ring, that could provide a short-term boost to the Stagecoach share price. Even aside from that, I already like these UK penny shares and hold them in my portfolio.
Stagecoach: UK penny shares to buy now
Many bus users have no alternative form of transport on given routes. Meanwhile, certain important bus routes are subsidised to run whether or not passenger numbers are commercially viable. What that adds up to for Stagecoach is a fairly stable demand and revenue outlook most of the time. While the pandemic led to lower demand, it also underlined the attractiveness of the business model: the company received substantial subsidies to run bus services even when passenger numbers were low.
There is a risk that permanently changed travel patterns could lead to permanently smaller revenues and profits in years to come. But I think Stagecoach has significant strengths. It is a well-known brand. Getting out of the rail business has enabled management to focus on the bus operation. In many cases, there is little or no competition for the company’s routes. I would happily add to the Stagecoach position in my portfolio at the current share price.
UK penny shares: Lloyds
Although it is much larger than Stagecoach, the bank Lloyds (LSE: LLOY) also trades for pennies. Lloyds is the only large bank among UK penny shares. It has traded in that territory since the aftermath of the financial crisis over a decade ago.
While it has grown 80% in the past year, lately the Lloyds share price has been sliding. It is around 12% lower than it was in May. Bears point to a number of risks for Lloyds. These include a heavy reliance on the UK market, which means any localised economic downturn could hurt revenues and profits. A move into home rentals also risks distracting management.
After the recent share price fall, I continue to rate Lloyds as among the more attractive UK penny shares for my portfolio. The company’s relatively simple business model and clear focus makes it easier to manage than internationally exposed rivals like HSBC and Barclays. Its iconic brand should continue to attract and help retain customers. The ongoing buoyancy of the UK housing market could help profitability improve further. I’d happily add UK penny shares of the calibre of Lloyds to my portfolio.
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Christopher Ruane owns shares in Lloyds Banking Group and Stagecoach. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.