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1 penny stock buy I’d pick for my Stocks and Shares ISA

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With April 5 now in the rear-view mirror, the new ISA year beckons. I now have the ability to invest up to £20,000 into my Stocks and Shares ISA over the next year as I see fit. Within my ISA, I can hold stocks for as long as I want. When I come to sell, any profit isn’t a taxable gain, allowing me to keep more of the profit for myself. Seeing as there’s no time like the present, I’m on the lookout for good ideas. Keeping an eye on penny stocks to buy now is one idea. 

A FTSE 250 penny stock buy

A penny stock is technically a share that trades for less than £1. So there are FTSE 100 and FTSE 250 companies that fall into this bracket. One example of a penny stock that I’m considering is Centrica (LSE:CNA). It currently has a share price around 56p, so ticks the box. Over the past year, the share price has risen by 50%.

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Centrica is a supplier of energy and gas, mainly to the UK. It trades under the names of British Gas and Scottish Gas, which are more familiar names for many of us. 

Over the past few years, the business has lost ground. The energy market has become a lot more competitive, and Centrica didn’t react quickly enough in this regard. Back in early 2018, it announced 4,000 job cuts as operating profit dropped by 17% due to lost customers. The company joined the ranks of penny stocks in 2019, as the share price fell below £1.

This streamlining process continued into last year and quickened due to the pandemic. Operating profit for 2020 was down 31%, as the process to modernise and simplify group operations continued. 

A long-term buy for my ISA

In my opinion, the worst is behind Centrica. I think that the stock offers me long-term value as the company should emerge from the transformation in a stronger position. 

I’m already starting to see this. For example, it recently completed the sale of a North American entity Direct Energy, netting $3.6bn. This should allow the business to focus on the UK market, as well as helping cash flow.

Its finances also improved during 2020, with free cash flow up 10% to £1.06bn and net debt down £0.4bn to £2.8bn. Both are positives from my point of view, and show that the business is taking steps in the right direction. 

Stiff competition in the energy market is likely to remain (and even increase) and so I see this as the main risk to my overall view.

I’m not going to claim that the stock could explode higher over the next couple of months, but I do think this has good potential over years to come. I don’t know exactly when the inflection point could be of breaking back into an overall profit. So I don’t see value in trying to time it perfectly, and would rather buy now and hold.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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