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.