When it come to screening for my next investment, I don’t pay that much attention to the share price. As such, I’m quite happy to add penny stocks to my portfolio, provided I research the underlying businesses. What matters more is the valuation of a company relative to metrics like its earnings. If I deem that a stock is attractively valued, then I’d consider buying it for my portfolio regardless of the share price.
In my search this week, I saw two penny stocks that have surged in 2022 already. Here’s what I’d do next.
Cineworld
The first company is Cineworld (LSE: CINE). The share price is 38p as I write, so it’s still firmly in penny stock territory. But the stock’s rallied almost 19% already this year. However, over one year, the stock is down a quite miserable 41%. Is the recent share price surge just a ‘dead cat bounce’?
The first thing I noticed when researching the stock is that there’s been no update on trading from the company recently. The recent share price surge can’t be explained by positive updates from Cineworld.
However, there was an update on 15 December. In it, Cineworld said it has been ordered to pay C$1.23bn in damages to Cineplex over a breach of contract. This is hugely damaging to the company as its current market value is only £521m.
But what about forecasts for this year? Cineworld is expected to grow revenue by over 100% in 2022 to £3.95bn. Earnings per share (EPS) are expected to swing from a loss back to 2.41p, which would value the shares on a price-to-earnings ratio of 21. I think this reflects the boost in demand the company might see if Covid subsides.
However, all things considered, there are too many risks here for me to want to buy the stock. Therefore, I do view the recent share price rally as a bit of a false dawn.
Hammerson
The next company is real estate investment trust (REIT) Hammerson (LSE: HMSO). Its current share price is 36p, which has popped 8.7% already in 2022. The stock’s also rallied a huge 50% over one year.
Hammerson specialises in managing and developing retail properties in the UK and mainland Europe. Unfortunately, the company suffered substantial losses during the pandemic. The retail sector was severely impacted by Covid restrictions, which reduced Hammerson’s rental income.
The company may be turning a corner though. EPS are forecast to increase by 32% this year, which is a huge turnaround from the heavy losses endured through the pandemic. Hammerson shares are also valued on a price-to-net-asset-value of only 0.6. This looks cheap to me, but it may be signalling further trouble in the retail sector due to continuing Covid restrictions.
I’m in favour of adding REITs to my portfolio for diversification though. They can also be excellent investments to grow my passive income. I do note that Hammerson has considerable debt on its balance sheet, which heightens the risk of any investment. Nevertheless, the stock looks very cheap today. I’m going to keep this on my watchlist for now to see how the retail sector recovers in the months ahead.
