Given the current economic climate, is there value to be found in UK penny stocks?

Our writer evaluates the prospects of two promising penny stocks on the London Stock Exchange. They each have a compelling value proposition.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Penny stocks are typically shares of small-cap companies, often characterised by limited market capitalisation and relatively low trading volume. This offers both benefits and risks to investors, as it can lead to heightened volatility — even small shifts in demand can significantly impact the share price.

For these reasons, they’ve long intrigued investors seeking substantial returns. While they come with inherent risks, current economic conditions may present compelling opportunities for those willing to navigate the challenges.

The ongoing economic uncertainty, including concerns about Brexit and global trade tensions, can create a volatile market environment. This volatility can present opportunities for savvy investors to identify valuable penny stocks that may benefit from future economic recovery.

There are a few penny stocks on the UK stock market that look good to me right now. The below two are in very different positions, with one already proving its worth with rapid price growth. The other has been in decline but the low price could provide a good opportunity to capitalise on future growth. 

Time Finance 

Time Finance (LSE: TIME) is a small financial services firm that offers products to consumers and businesses in the UK. Its core focus is funding small-to-medium-size enterprises (SMEs), with over 10,000 UK companies already signed up. It joined the AIM index in 2006 after eight years of operation and has since rebranded and acquired several businesses. 

Last year, it achieved £33m in revenue with operating profit doubling to almost £6m.

However, with the share price soaring 114% in the past year, it’s now considered overvalued based on cash flow estimates. That could limit short-term growth. Additionally, as a small-cap stock, it’s more prone to extreme price fluctuations. This can lead to substantial losses in a short period.

Despite the significant earnings growth in the past year, its price-to-earnings (P/E) ratio is still low, at 12.5x — well below the UK market (16.3x). This suggests the stock is selling at a decent price compared to income.

Zephyr Energy

Zephyr Energy (LSE: ZPHR) is a sustainable energy company focused on responsible resource development and carbon-neutral operations. It prospects for oil and gas resources in the Rocky Mountains in Utah, USA. On 6 September, after successful testing, the board approved drilling at its flagship well to increase hydrocarbon potential. 

This is a key development for the company.

However, it’s currently unprofitable and has a $29.2m debt load. For now, it’s sufficiently covered by operating income but further debt could strain its balance sheet. Small-cap companies typically face greater financial and operational risks compared to larger, more established firms. Additionally, thin trading volumes can make selling the stock at the desired prices difficult.

The price has been in decline the past few months, falling from 5.7p to 3.6p since early June. This could present a great opportunity to grab the stock at a discount. It’s now trading at 87.1% below fair value based on future cash flow estimates, with earnings forecast to grow 92.5% in the coming year. 

Analysts are in good agreement that the stock price will rise by more than 300% in the next 12 months.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has 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.

More on Investing Articles

Stack of one pound coins falling over
Investing Articles

2 penny shares I think could shine in 2025

I have my eye on a few penny shares, as I'm thinking that the year ahead could turn out to…

Read more »

Investing Articles

2 ISA strategies for success in 2025

The ISA is a great vehicle for our investments, sheltering our returns from tax and providing us with the opportunity…

Read more »

Investing Articles

Here’s how an investor could start building a £10,000 second income for £180 per month in 2025

Our writer illustrates how an investor could put under £200 each month into shares and build a long-term five-figure passive…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’m finding bargain shares to buy for 2025!

Our writer takes a fairly simply approach when it comes to hunting for cheap shares to buy for his portfolio.…

Read more »

A graph made of neon tubes in a room
Investing Articles

Up 262%! This lesser-known energy company is putting other S&P 500 stocks to shame

Our writer delves into the rationale behind the parabolic growth of this under-the-radar S&P 500 energy company. The reason isn’t…

Read more »

Investing Articles

Just released: December’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£20k of savings? Here’s how an investor could turn that into passive income of £5k a year

A £20k lump sum, invested in a mix of blue-chip shares with a long-term approach, could generate thousands of pounds…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Is the BP share price set for a 75% jump?

The highest analyst target for BP shares in 2025 is 75% above the current price. So should investors consider buying…

Read more »