When I think about penny stocks, my initial thought goes to a small company trading out of an industrial estate. In reality, there are some very large international brands that currently have a share price of less than 100p. With some having lost a lot of ground since the pandemic, here are two examples that I think could do well this year.
A FTSE 100 penny stock
The first company is Rolls-Royce (LSE:RR). It currently has a share price of 97p, and is down 5% over the past year. This doesn’t quite do justice to the struggles of the business since Covid-19. The 67% fall over the past three years tells the story better in my opinion.
The main reason why Rolls-Royce is a penny stock is due to the Civil Aerospace division. The need for servicing and providing new or existing engines has shrunk. This is due to the lack of flying hours from major airline operators.
However, my outlook for the business is much more positive than it was a year ago. In fact, when I look at the difference between the share price and other valuation tools, I don’t think this will remain a penny stock for much longer this year.
I wrote about the company in detail last week, with my calculations leading me to think that the long-term upside could be 40-50%. If the Civil Aerospace division makes back its losses and posts a performance similar to 2019, it would help to boost group operating profit by around 42%.
Further, if I compare the enterprise value (an alternative way of valuing a business) of £13.79bn to the market capitalisation of around £8.5bn, it does indicate to me that the share price is quite low.
The clear risk here is that permanent damage has been done to the company, and I’ll have to accept that pre-pandemic output is simply not achievable going forward.
A commodity firm with upside
The second of the penny stocks I like is Tullow Oil (LSE:TLW). The share price might be up by 17% over one year, but again, the true picture can be seen when I look at the three-year performance. Over this timeframe, the shares are down 77%.
The struggles for Tullow over the past few years have been numerous. During late 2019 and early 2020, it revised down oil output expectations from Ghana. The fall in the oil price in 2021 to below $0 was something that hurt all businesses in the sector. Tullow also saw net debt climb into the billions which still weighs on the balance sheet.
Looking forward though, I think the penny stock has put the worst behind it. The share price has been rallying in recent months thanks to the surging oil price. With prices still holding above $100, Tullow will be able to benefit from this in Q2.
Another factor to support share price growth this year was seen last month. The business increased the production guidance for two oil fields (Jubilee and TEN), something that should give investors more confidence for the coming year.
