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The allure of a penny stock can be intoxicating to some novice investors. Often, the low per share price gives the illusion of affordability, making it easier for people with limited capital to invest.
In other words, an investor with £200 might prefer to buy 1,000 shares of a 20p stock rather than 2 shares of a FTSE 100 shares trading for £100. They might equate a low share price (20p) with being “cheap” and a high price (£100) with being “expensive”.
However, judging a stock based on price alone is a common mistake that investors should avoid.
Focus on the fundamentals
A company's market capitalization is calculated by multiplying its share price by its outstanding shares.
For example, Lloyd's'The share price is 54 pence. However, it's certainly not a penny stock. In fact, with a sizeable market capitalization of £33 billion, it is the 20th largest company listed in London. All this tells us is that the bank has a large number of shares outstanding (about 60 billion, in fact).
In contrast, Scientific Judges it's a small AIM-listed company specialized in scientific instruments. Despite only having a market capitalization of £577 million, making Lloyds approximately 57 times larger, Judges Scientific's share price is 8,700 pence (£87). There are much fewer actions.
In this case, an investor with £200 can buy 370 Lloyds shares or 2 Judges Scientific shares (costing £174). However, what really matters is the underlying business, its growth potential and future earnings prospects, not whether the share price looks high or low.
Valuation
Next, it is essential to consider the valuation. As Warren Buffett says: “Price is what you pay, value is what you get.”
A 20p share could be incredibly expensive (a terrible investment), while a £100 share could be a real bargain. And vice versa.
A cheap UK small cap
I have a 19p small cap share in my own portfolio. is called hLIVE (LSE: HVO). The £133 million company is a leader in testing infectious diseases through human challenge studies. This is where healthy volunteers are infected with a pathogen to study the progression of the disease and the effectiveness of a possible treatment.
hVIVO has its own state-of-the-art quarantine facilities and recruits volunteers through its FluCamp platform. It works with four of the top 10 global pharmaceutical companies and is growing at a good pace.
Unfortunately, the share price has fallen 34% since mid-November (although it is still up 285% in five years). The main reason for this hammering appears to be Donald Trump's nomination of vaccine skeptic Robert Kennedy Jr. to lead the Department of Health and Human Services.
The risk here is that his appointment could lead to less funding for vaccine research and development, which could impact hVIVO's growth trajectory.
However, this is speculation and Kennedy may not even get the job. On December 17, the vaccine giant Pfizer He said he doesn't expect any major policy changes around vaccines in 2025.
Meanwhile, hVIVO recently signed a £11.5m contract with a Tier 1 pharmaceutical client to trial an antiviral for respiratory syncytial virus (RSV). It also reaffirmed full-year revenue guidance of £62m and is targeting £100m by 2028.
After this drop, the stock is trading with a forward price-to-earnings (P/E) ratio of just 11.7. It seems very cheap to me, so I will buy some more shares in January.
