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The allure of penny stocks can be addictive for some novice investors. Often, a low price per share gives the illusion of affordability, making it easier for people with limited funds to invest.
In other words, an investor with £200 might prefer to buy 1,000 shares of 20p stock instead of 2 shares FTSE 100 a stock trading at £100. They may rate a low share price (20p) as ‘cheap’, and a high price (£100) as ‘expensive’.
However, judging a stock based on price alone is a common pitfall investors should avoid.
Focus on the basics
A company’s market cap is calculated by multiplying its share price by its outstanding shares.
For example, LloydsThe share price is 54p. However it is certainly not a penny stock. In fact, with a market capitalization of £33bn, it is the 20th largest London-listed firm. All this tells us that the bank has a lot of shares (about 60bn in fact).
In contrast, Science Judges it is small CHECK-a listed company dealing in scientific instruments. Despite having a market cap of just £577m, making Lloyds 57 times bigger, Judges Scientific’s share price is 8,700p (£87). There are very few shares.
In this case, an investor with £200 could buy 370 shares of Lloyds or 2 shares of Judges Scientific (worth £174). However, what really matters is the underlying business, its growth potential, and future profit prospects – not whether the stock price seems high or low.
Measurement
Next, measurement is important to consider. As Warren Buffett says: “Price is what you pay, price is what you get.”
A 20p stock could end up being surprisingly expensive (bad investment), while a £100 stock could be an absolute steal. And vice versa.
Cheap UK small cap
I have a small 19p stock in my portfolio. It is called hVIVO (LSE: HVO). The £133m firm is a leader in infectious disease testing using challenging human studies. This is where healthy volunteers are infected with the pathogen to study the progression of the disease and the effectiveness of potential treatments.
hVIVO has its own state-of-the-art quarantine facility and recruits volunteers through its FluCamp platform. It works with four of the world’s top 10 pharmaceutical companies and is growing well.
Unfortunately, the price is down 34% since mid-November (although it’s still up 285% in five years). The main reason for this conflict appears to be Donald Trump’s appointment of anti-vaccinationist Robert Kennedy Jr. to head the Department of Health and Human Services.
The risk here is that his nomination could lead to less funding for vaccine research and development, which could impact the growth of hVIVO.
However, this is speculation and Kennedy may not even get the job. On December 17, the vaccine giant Pfizer said it does not expect major policy changes around vaccination in 2025.
Meanwhile, hVIVO recently signed an £11.5m contract with a top-tier pharma client to test an antiviral for respiratory syncytial virus (RSV). It also confirmed guidance for full-year revenue of £62m, on target for £100m by 2028.
After this decline, the stock trades at a forward price-to-earnings (P/E) ratio of just 11.7. That looks pretty cheap to me, so I’ll be picking up a few more shares in January.
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