Penny stocks have a bit of a bad reputation. Some investors won’t touch these shares because they think they’re high risk. This is true in some cases.
However, the definition of a penny share is incredibly broad. As such, companies with market values of more than several hundred million pounds can often be classified as penny stocks.
Due to the size of these businesses, they can be less risky than smaller companies. And it’s these organisations I’d focus on when looking for penny stocks. Here are two options.
Penny stocks to buy
Real estate investment trust Hammerson (LSE: HMSO) has struggled over the past 12 months. Last month, the company announced its largest-ever loss of £1.7bn. That came after writing down the value of its assets by £1.4bn, due to the pandemic. Net rental income of £157.6m was down 41% on a like-for-like basis, excluding premium outlets.
As income plunged last year, Hammerson was forced into a £552m rights issue to shore up its balance sheet. This cash call did what it was supposed to, reinforcing the group’s balance sheet enough to get it through the worst of the crisis.
The most considerable risk the company faces right now is falling commercial property values. These could hamper its ability to return to growth and sell assets to strengthen its balance sheet further. Declining rental values may also hold back the group’s recovery.
Nevertheless, with the stock trading at a price-to-book (P/B) value of just 0.5, at the time of writing, I think this company looks cheap. That’s why I’d add it to my basket of penny stocks today. This corporation faces many risks, and it certainly isn’t for the faint-hearted, but I think it has recovery potential.
Recovery investment
Coats Group (LSE: COA) produces sewing threads for the healthcare, fashion and industrial sectors. Like many businesses, the manufacturer has suffered throughout the pandemic. Earnings declined 72% in 2020.
However, analysts are expecting a rapid recovery in 2021, with the recovery continuing into 2022. In fact, income in 2022 is expected to exceed 2019 levels by around £10m.
Of course, these are just projections at this stage. There’s no guarantee the firm will meet City growth targets. Nevertheless, I think these numbers showcase Coats’ potential. If the company can return to growth in the next two years, I reckon it could be one of the best penny stocks to buy right now.
The most significant potential headwind the firm faces is a resurgence of coronavirus. If another wave results in another lockdown, Coats’ earnings may stutter once again, and the group’s return to growth will be disrupted.
Despite this risk, I’d buy the company for my portfolio of penny stocks. I think it has excellent recovery potential over the next few years as the UK economy starts to recover from the Covid crisis.
