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.

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.

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But sometimes it gives rise to company valuations that appear to be divorced from reality. To illustrate this point, I’ve found two examples.

Onwards and upwards

Time Finance (LSE:TIME) is a specialist lender to over 10,000 small businesses in the UK.

Since its IPO in August 2006, it’s expanded both through acquisition and organically. At 31 August 2024, it had a loan book of £205m. In May 2021, the directors set a four-year lending target of £230m. It looks to me as though it’s going to achieve this goal comfortably ahead of schedule.

The company’s results for the year ended 31 May 2024 (FY24) disclosed revenue of £33.2m (FY23: £27.6m) and a profit before tax of £5.9m (FY23: 4.2m).

All this positive news has helped its share price increase by 98% since November 2023.

And with a book value of £66m and a current (6 November) stock market valuation of £55m, there’s a case to be made for suggesting that its shares are undervalued.

But its stock is currently trading on a historic price-to-earnings ratio of 15.5, which is higher than all of the FTSE 100‘s banks.

All over the place

In contrast, the share price of Bango (LSE:BGO) has fallen 39% over the past year.

It helps telecoms companies and content providers retain customers through the bundling of subscriptions. It has a blue-chip customer list in a global subscriptions market that could, by 2026, be worth $600bn.

But its share price can fluctuate wildly.

For example, the value of its stock crashed 40% on 17 January when it issued a trading update. The company warned of delays in securing new contracts and identified $2m of unexpected costs.

On 8 April, it presented its results for the year ended 31 December 2023 (FY23). Despite the $6.7m increase in post-tax losses, its shares went up 13.5%. The 62% growth in revenue is the only explanation I can come up with for this apparently perverse market reaction.

And inexplicably, on 30 July, its share price tanked 12% after it added Nord Security’s products to its so-called digital vending machine.

No thanks!

But despite their growth potential, I don’t want to invest in either of these stocks.

They’re too risky for me and have characteristics typical of AIM shares that has historically put me off investing in smaller companies.

The rise in the share price of Time Finance appears to be divorced from its underlying performance. It now attracts a higher earnings multiple than, for example, Lloyds Banking Group.

And loss-making Bango has a valuation that’s 46% higher than Time’s.

Its stock price is also highly erratic. The combination of relatively few shares in issue and a small market cap, means a trade of a few thousand pounds can have a dramatic impact on its stock market valuation.

I’m not saying they’re bad companies. Their AIM listing has played an important part in fuelling their impressive growth. But I prefer to buy larger companies — with more sensible valuations — and ones whose share prices tend to be more predictable.

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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.

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