The FTSE 100 and FTSE 250 indexes, which includes some of the biggest British and international companies, do not have too many penny stocks. Penny stocks are those with a share price of less than £1. But there are some.
Until recently there were three in the FTSE 100 index alone, but Rolls-Royce breached that level in February. And energy provider Centrica (LSE: CNA) rolled out of the FTSE 100 index to become part of the FTSE 250 in mid-2020.
Which leaves Lloyds Bank as the only penny stock among the FTSE 100 constituents.
Here I explore both Centrica and Lloyds Bank in greater detail.
Why penny stocks are attractive
In principle, they are attractive because I can own a piece of these large companies at dirt-cheap prices.
However, I am interested in knowing if the share price can continue to rise fast before deciding whether they meet the cut as an investment in my portfolio. If they cannot, I am better off investing in far fewer shares of a fast growing FTSE 100 stock than many more in penny stocks that are going nowhere.
And that is the key question I am looking to answer – can their share price continue to grow? If not, then they are best avoided.
Centrica makes big gains
First, let us look at Centrica. The FTSE 250 energy provider’s share price has almost doubled in the past year. In today’s trading alone, its share price is up 2.6% as I write, making it one of the biggest index gainers today.
Centrica’s recent full-year results are far from the worst we have seen this year. Its operating profits are down by 31% in 2020 from the year before. But it still earned a decent £447m in absolute numbers. Its net debt too, is down by 13%, which is a notable figure at a time when many companies have racked up huge debts.
The company is in the process of restructuring, however, which will take its time to complete. It is also uncertain about the next year, and refrains from guidance.
While there is merit to the stock, I am just not sure if there is much more steam left in it for now. It is on my radar, but I am not buying it now.
Better times ahead for the Lloyds Bank share price
Lloyds Bank has not seen the kind of share price increase that Centrica has. But it too has had good going so far in 2021. As I write, the Lloyds Bank share price is up 1.6% in today’s trading.
The bank’s business is closely linked to the economy, which is widely expected to come back with a bang this year. Its dividend can rise further too. But there are risks too, which among other things, include a share price that has run-up a fair bit already.
I am more positive on Lloyds Bank than Centrica with respect to share price rise potential, but I am watching both for now, not buying them.
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Manika Premsingh has no position in any of the shares 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.