Penny stocks have a reputation as adventurous or risky investments. Some of them are certainly more speculative than I’d like. But I reckon there are some good companies too – smaller growth stocks with the potential to deliver big returns.
In this piece, I’ll discuss two penny stocks I think could be worth considering for growth investors.
A fast-growing niche lender
Time Finance (LSE: TIME) specialises in loans to small and medium-sized businesses. The company’s two main areas of focus are lending secured by so-called hard assets (such as machinery or vehicles) and invoice factoring.
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Time’s loan book has doubled to over £200m since May 2021. Its share price has also doubled over the same period.
Management recently announced plans to target a further 50% growth in lending to over £300m by 2028.
Of course, lending money is not necessarily difficult. It’s getting it back – with a healthy profit – that can be harder. This is where I think the opportunity could be.
Time Finance’s recent growth has been profitable, but not as much as I’d like to see. The company generated a return on equity of around 7% last year, which is rather average.
However, CEO Ed Rimmer believes he can increase this to “mid-teens percentages” by 2028. If Time Finance can deliver a bigger loan book and higher returns on equity, I think the stock could deserve a higher valuation.
Brokers have a price target of 112p for this penny stock, but this isn’t without risk. This business has suffered problems with lending quality and growth before. It could do so again, especially if the UK economy slows.
I wouldn’t bet the farm on Time Finance. But I think the shares are worth considering as a buy at current levels, as part of a diversified portfolio.
Scientific growth
Another penny stock on my radar at the moment is scientific instruments maker SDI Group (LSE: SDI). As its name suggests, this company owns a number of businesses that produce specialist scientific and industrial equipment.
Profits hit record levels during the pandemic, due to a surge sales of specialist PCR cameras used in Covid testing.
The company says that life sciences and biomedical markets are more challenging at the moment. Adjusted pre-tax profit for the six months to 31 October 2024 fell by 13.5% to £3.2m.
However, chief executive Stephen Brown says the company has seen “improvements from September onwards”.
Broker forecasts certainly suggest the low point may have passed for SDI. City analysts expect the company’s pre-tax profit to be stronger during the second half of the year and are forecasting a full-year result of £8.4m. Further progress is expected in 2025/26.
Meanwhile, SDI is continuing to expand through acquisitions, adding new specialist capabilities to its portfolio.
The main risk for me is that SDI’s management will overpay for acquisitions — or choose deals badly.
However, SDI shares are currently trading on just nine times forecast earnings. I think there could be a significant opportunity here, if growth gets back on track.
Brokers have a price target of 135p for the shares, more than double the current share price.
