When looking for the best penny stock to buy, I don’t necessarily have to look for AIM-listed companies. Within the FTSE 100 and FTSE 250, there are stocks that have a share price of less than £1. Cineworld (LSE:CINE) is one such example, with a share price of 63p at the moment. Larger companies can still technically be classified as a penny stock when I use the above logic. So when looking for cheap stocks, is Cineworld on the list?
A fall from grace
Traditionally, people associate penny stocks with small companies with smaller market capitalisations. However, another way for a company to have a share price below 100p is falling on hard times. This is the case for Cineworld. If I rewind to the beginning of 2020, the share price was trading comfortably around 220p. There were few signs that it would become a penny stock just a few months later.
The main driver behind the move lower was the impact of the pandemic. Lockdowns meant that people couldn’t go to the cinema. Even during periods when lockdown was eased last year, many didn’t want to go to a Cineworld location. I was in this camp myself, not wanting to go to an enclosed space with strangers that might not be vaccinated.
The toll on Cineworld financials over the past year has been clear. The loss shown in the 2020 annual report was $2.65bn. This was largely because revenue was hit hard. It fell from $4.3bn in 2019 to just $852m in 2020. The Cineworld share price fell through the floor as 2020 unfolded, making it a penny stock.
The best penny stock to buy now?
There are lots of smaller companies that I could look to now and assign the title of the best penny stock to buy now for my portfolio. So why would I give this title to struggling Cineworld?
Firstly, I could argue that the worst is now behind the company. The progress from the US and UK in terms of vaccination rates and easing restrictions means that sites can now open. In fact, in the half-year update, Cineworld noted that all sites have been open since June. This should enable the business to get revenue in the tin.
Secondly, Cineworld should benefit from film studios releasing blockbusters back exclusively via cinema. It noted 16 large scale movies that are due to be released before the end of the year. So it has the tools there to attract customers back into watching films in the cinema.
I do have concerns around it being the best penny stock for me to buy now. Although the cash burn rate is less than forecasted, it’s still burning through $45m a month. This is significant, and is requiring more debt issuance to support it in the near term. Even if revenue does pick up soon, it still has a large debt pile to address.
Finally, as I noted last month, even though the penny stock looks cheap in the 60p’s, it could fall even further before pulling back higher. So on balance, I think I can find penny stocks that I can have a higher conviction on than Cineworld at the moment, so I won’t be buying after all.
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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. 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.