A penny stock on the up

Zephyr Energy is a gas and oil production business with a focus on undertaking economically attractive projects. It focuses its efforts in the Rocky Mountain region of the US. It is led by a management team with a vast and diverse history in the oil and gas sectors.

So what’s been happening with the Zephyr share price? Well, as I write, the shares are trading for 5p. At this time last year, the shares were trading for 2p, which is a 150% increase over a 12-month period.

The fact that Zephyr shares have jumped is not something I’m getting particularly excited about. As a penny stock, it is prone to sharp share price movements upwards and downwards.

Risks to consider

Firstly, the gas and oil markets are saturated and dominated by larger players. These players have a larger profile, presence, and financial muscle. If Zephyr finds a lucrative asset, it could be beaten to it or even outbid or bought out by a larger player.

Zephyr’s performance is currently linked to the potential it is forecasting for some of its core assets. Forecasts are not guaranteed and may not come to fruition. If this were to happen and performance was to be affected, the shares in the penny stock could plummet.

Why I’m buying Zephyr shares

A Q1 update released two days ago was promising for me as a soon-to-be-owner of the penny stock. During the quarter, Zephyr sold 144,540 barrels of oil, which was up from Q4 figures. By the end of Q1, it had 185 wells available for production. This included seven new wells that came online during the quarter. Production seems to be ramping up, which will only boost performance. Zephyr also said Q1 revenues totalled $11.5m and a high profit margin was achieved. It did not provide comparisons of these figures to past trading, however.

General market conditions are another factor in me looking to add Zephyr shares to my holdings. According to Statista, demand for oil is on the rise and next year will surpass pre-pandemic levels.

Finally, Zephyr recently rebranded and restructured its business last year with a focus on leaner, more efficient working to generate as much profit as possible. This fresh impetus, coupled with its strong management team and their respective experience, could boost performance and returns.

I think the risk to reward ratio is quite low. At 5p per share, I’m planning on adding 10 Zephyr shares to my holdings which equates to 50p overall. This is not a huge risk or imposition for me and if I were to lose this amount due to the penny stock sinking, it would not affect me too much.

Zaven Boyrazian: Bioventix

Bioventix (LSE:BVXP) is a specialist producer of monoclonal antibodies. These are an essential ingredient for performing blood tests when diagnosing a patient. It’s undoubtedly a niche product but remains in high demand as revenues have consistently grown by double digits over the last five years.

Recently, the stock has taken a hit as hospitals have prioritised spending in areas dealing with Covid-19. Consequently, the group’s bottom line has suffered for it. But, with the vaccine rollout making good progress and the world adapting to the pandemic environment, these disruptions may soon be coming to an end.

As such, I think this could be an excellent addition to my portfolio.

Zaven Boyrazian does not own shares in Bioventix.

Ed Sheldon: Calnex Solutions

My top British small-cap stock for January is Calnex Solutions (LSE: CLX). It’s a leading provider of testing and measurement services to the telecommunications industry.

Calnex looks well placed to benefit from the global telecommunication industry’s upgrade to 5G technology. 5G is ultimately the key to many of the exciting new technologies we keep hearing about such as self-driving cars and remote surgery. Networks will need to be tested thoroughly in order for these kinds of technologies to go mainstream.

One risk to consider here is the ongoing semiconductor shortage. This could cause disruption. However, with the stock trading on a P/E ratio of less than 25, I think the risk/reward proposition is favourable.

Edward Sheldon owns shares in Calnex Solutions.

Roland Head: Finsbury Food

My small-cap pick for January is bakery firm Finsbury Food (LSE: FIF). This group supplies supermarkets and also sells under its own brands.

Finsbury has been going through a turnaround period, but now appears to be trading well. Earnings rose by 15% last year and brokers expect growth of 26% for the year ending 26 June.

Rising costs are a concern and supermarkets will always be tough customers. But I’m impressed by Finsbury’s recent performance. I think the stock still looks good value at under 10 times forecast earnings. I hold Finsbury shares and would buy more.

Roland Head owns shares of Finsbury Food.

Rupert Hargreaves: Michelmersh Brick Holdings

My top small-cap is Michelmersh Brick Holdings (LSE: MBH). The specialist brick manufacturer looks set to report a bumper year of growth for 2021, which could underpin further development in the year ahead.

The firm has no debt and a cash-rich balance sheet, suggesting that it has the financial headroom to support its growth ambitions this year. There is also room for shareholder returns. Michelmersh currently supports a dividend yield of 2.5%.

Inflation and competition are the two primary risks the business will have to overcome going forward. Despite these challenges, I would buy this small-cap stock today.

Rupert Hargreaves does not own shares in Michelmersh Brick Holdings.

G A Chester: B.P. Marsh & Partners 

B.P. Marsh (LSE: BPM) is a specialist investor in unquoted, early-stage financial services businesses that are in need of growth capital. 

Marsh looks for strong management and business plans. It takes a minority equity stake (typically 20%-40%), and aims to be a supportive, long-term partner. It works with management to grow the business’s value, ultimately towards a profitable exit via a public flotation, trade sale or other route. 

It has a long history of delivering value for shareholders through net-asset-value (NAV) appreciation and dividends. The shares are currently trading at a 20%+ discount, and I’m expecting a further NAV uplift in an early-February trading update. 

G A Chester has no position in B.P. Marsh & Partners.

Niki Jerath: Zephyr Energy 

For January, I’m looking at Zephyr Energy (LSE:ZPHR). This has oil and gas interests in Utah, Colorado and North Dakota.  

As oil and gas prices increased during 2021, its shares surged by over 600%. Although year-to-date, the stock is down around 2% due to worries about the Omicron variant. 

That said, its Paradox Basin project, in Utah, shows a lot of promise for 2022 and it has a pending deal in North Dakota, which was delayed last year. 

I could be wrong, but if the transaction goes ahead, I expect the share price to see a jump. 

Niki Jerath does not own shares in Zephyr Energy

Royston Wild: Card Factory 

I think Card Factory (LSE: CARD) is a small-cap stock whose eye-catching all-round value merits serious attention. The card and greetings retailer trades on a forward P/E ratio of below 6 times. It sports a mammoth 6.1% dividend yield as well. 

I like Card Factory for a number of reasons. Its strategy of selling products at low prices puts it in good shape to ride the value retail revolution. Recent investments in digital will allow it to make money during the e-commerce boom. I also like Card Factory’s focus on a more-defensive part of the retail market. We don’t stop celebrating birthdays, Christmas and other special occasions when times get tough, right? 

Royston Wild does not own shares in Card Factory.

Paul Summers: Cake Box Holdings

At 25 times earnings, shares in Cake Box Holdings (LSE: CBOX) certainly aren’t cheap. That said, the company’s fundamentals help justify this valuation. Returns on capital and operating margins are consistently high and there’s net cash on the balance sheet. CEO Sukh Chamdal also owns almost 25% of the company, which should mean that his interests are aligned with those of other investors.

Having already climbed 70% in the last year, share price growth may moderate in 2021. However, this looks like the sort of quality minnow I’d be comfortable holding a stake in for years rather than months.

Paul Summers has no position in Cake Box Holdings

Andy Ross: Property Franchise Group 

Shares in Property Franchise Group (LSE: TPFG) bring together an attractive combination of growth and income. Over three years the shares have gone from 120p to around 314p. Historic share price growth then has been good. The dividend yield is currently around 3%, but with decent levels of dividend cover, as well as earnings growth, I’m sure the dividend can keep growing.  

As a franchising operation, the business has high operating margins and returns on capital. For me, this makes Property Franchise Group a top British small-cap stock and I’ll likely be adding more, especially if the share price dips again.  

Andy Ross owns shares in Property Franchise Group.

An award-winning penny stock

If there was a naughty and nice list for stocks over the past year, Zephyr Energy (LSE: ZPHR) would be right at the top of that nice list. At this time last year, a share in this company was trading at 0.82p. Today it is worth 6.85p – representing an award-winning 755% appreciation in share price. Not bad for a penny stock. The winner of the Best Performing Share Award at the prestigious AIM Awards this year is a growing oil company with operations in the US Rocky Mountains. The longer-term risk for Zephyr is the obvious push to phase out fossil fuels, but for the moment, demand remains high. The combination of high demand, recent successes in drilling activities, a very competent and experienced management team, and the 6p price tag on this stock make it a no-brainer for me.

A potential dark horse going into 2022

Travel and lifestyle bookings company Ten Lifestyle Group (LSE: TENG) is next on my list. In the wake of the Covid-19 pandemic, the company has naturally taken quite the beating. Losses have been the order of the day over the past two years but the stock price is yet to reflect this. In fact, this penny stock is up 16% year to date. Now, am I expecting this stock to make me wealthy? Certainly not. But what I’m willing to gamble on is a return to some semblance of normalcy in 2022. Already in September of this year, the company announced that bookings were back to pre-pandemic levels. Provided restrictions continue to get lifted, there could be nice returns here in 2022.

Cheap tech 

Idox (LSE: IDOX) is probably my favourite addition to this list. You simply don’t get tech companies that cost 69p. My colleague James Reynolds, recently wrote about how this penny stock rose roughly 20% in the past year. Idox sells software solutions, mainly to governments but also in the private sector. With a growing base of recurring and non-recurring customers, Idox is likely to continue on its upward trajectory in the future. What I would like to see from Idox in the coming year is growth of its markets at home and abroad. Right now Idox has some presence in Egypt, the Bahamas, and Saudi Arabia. Razer thin margins threaten to impair the growth outlook of the business, but if it can continue to grow in 2022, the sky is the limit for the price of this stock.

I would want to buy these soon or early in 2022 as they could offer lucrative returns over the longer term. As the year progresses, their prices could rise higher so I see an opportunity to get in early, while they are cheap and add them to my portfolio.

Definition and risk

Sometimes referred to as penny shares, these are stocks that trade with a share price below £1. The firms also have a market capitalisation of below £100m usually. In most cases, these firms are small, lower-valued businesses. Due to this, there is a higher element of risk involved. The reward can also be higher if things go to plan based on product and services offered and performance. 

It is worth noting some of the general risks associated with penny stocks. Firstly, there is usually scare information available about these firms, as they aren’t followed by many research analysts. I like to do lots of research and due diligence before I buy any shares. Often, these shares either simply don’t have enough information out there or it come from sources that I wouldn’t consider credible. This can be a red flag that puts me off.

Next, penny stocks can often have a lack of history due to the fact they are newly formed. I understand past performance is not a guarantee of the future but I review it as a gauge when reviewing investment viability.

Finally, these shares can often have a lack of liquidity meaning they have little cash for the business to invest into product launches, research and development, and other activities. Penny shares can often be victims of stock price manipulation too. This can happen when someone buys a large amount of stock, hypes it up, and then sells it after other investors find it attractive.

Penny stocks to buy #1

Seeing Machines (LSE:SEE) is a tech stock based in Australia. It specialises in artificial intelligence (AI) tech to help reduce transport-related accidents with real world applications. This tech is applied in automotive, rail, aviation, and off road sectors. Seeing Machines has a global presence already and can count some major names among its customers. These include Emirates Airlines and General Motors.

As I write, the Seeing Machines shares are trading for 11p. At this time last year, the shares were trading for 5p, which is a 120% return. I am a fan of tech stocks generally so when a penny stock is on my radar with new and exciting tech applications, I take a good look at it. So far Seeing Machines looks an exciting prospect for such a cheap price. It seems to be using technology to solve a real problem and save lives.

Seeing Machines released year-end results last week, which made for excellent reading. Revenue increased 18% compared to last year and profit increased by 44%. Net cash also increased, which will solidify its balance sheet. Operationally, it reported its tech was now implemented in further General Motor’s models and new strategic deals were close to being signed off with other manufacturers of transport modes. This will boost performance in 2022.

Seeing Machines also has a decent track record of performance. I can see that revenue and profit have been increasing year on year for the past four years.

All penny stocks have risks. Seeing Machines could be out-muscled by larger tech firms that might decide enter the same space, despite its good progress to date. Furthermore, share prices can be volatile for small caps. Seeing Machines is trading close to all-time highs, so any negative news could cause a major shock to the share price.

Overall I would happily add Seeing Machines shares to my portfolio for 2022. I believe it is an exciting company at a cheap price with some excellent fundamentals to date behind it. I wouldn’t be surprised to see the share price continue to climb in 2022.

Pick #2

Zephyr Energy (LSE:ZPHR) is an investment platform designed to undertake economically attractive gas and oil projects. It is designed to focus on developments in the Rocky Mountain region of the US. Zephyr was formed by individuals with lots of experience in the gas and oil industry. 

Part of my bullish stance on Zephyr stems from oil and gas demand. The demand for both is high right now and a small cap like Zephyr could capitalise. Oil demand may be declining in the very long term but for now there is lots of demand, especially as the world recovers from the pandemic.

As I write, shares in Zephyr are trading for just over 6p. A year ago shares were trading for less than a penny, at 0.63p. That equates to a return of over 800%. Penny stocks can often experience huge share price increases in a short space of time so I am not getting too excited.

This year has been a particularly fruitful one for Zephyr. A re-brand and new management team have renewed focus and strategy since 2020. It has also made significant drilling progress in some of its prominent sites, especially one in Utah for which it has a lot of expectations. At the site drilling operations had been completed, it hit primary and secondary targets, and there were signs of natural gases and oil. A further update since points to the finalisation of well design so things are looking good.

Zephyr does come with risks. Like Seeing Machines, it is a very small fish in a large pond and could easily be out muscled and outmanoeuvred by a larger firm if they entered the same space geographically. Finally, Zephyr’s progress is based on projections to date rather than tangible results, which is a credible threat to any investor returns.

Overall, for 6p per share, I would happily add a small amount of shares to my portfolio. I would expect the share price to rise in 2022 and beyond. I believe my investment could grow and offer me a return in the long term, especially if some current projects begin to yield tangible results by way of oil and gas.

FTSE AIM incumbent

Zephyr Energy is an investment platform formed to undertake economically attractive oil and gas projects. It focuses entirely on developments in the Rocky Mountain region of the US. Zephyr is headed up by a management team with decades of experience in the US oil and gas industry. This experience allows it to pick and focus on the best projects available.

I am aware that in the longer term, the demand for oil is on a decline. In the short term, however, demand remains high. I believe that with the world economy on a rebound after the pandemic, demand will surge going forward. 

If oil prices remain within their current range or go higher, Zephyr could be a good value play in my opinion. As I write, shares are trading for 6p per share. This time last year, shares were trading for less than a penny, 0.78p per share to be specific. This equates to a 660% share price increase. Penny stocks often experience such high increases from time to time.

2021 a breakout year for Zephyr?

2021 has been a promising year for Zephyr. I believe its rise in share price can be attributed to some of its progress and positive developments on its project and in the boardroom.

Firstly, in 2020, Zephyr introduced a new management team which resulted in a restructure and a rebrand of the company. I believe this has provided the firm with a new focus and new directors have played a vital part in 2021’s successes to date.

Last month, Zephyr announced drilling operations had been completed at its most prominent site in Utah. It hit its primary and several secondary targets at the Cane Creek reservoir. This drilling indicated hydrocarbon charge “across its entirety.” Natural gas and crude oil are mixtures of different hydrocarbons. This is a positive development in my opinion. A further update since this time with further tests has resulted in Zephyr beginning to finalise the well design which means things are moving forward nicely.

Penny stocks have risks

Zephyr Energy’s primary issue for me is that a lot of its promise is based on projections, drilling reports, and potential. For me, this means I may not see much of a return on my investment if I were to buy shares right now as no oil has emerged just yet.

Overall, I would be willing to buy a small amount of Zephyr shares for my portfolio at 6p per share. At such a cheap price and with the progress made on its projects to date, I would be willing to take the risk. Because of the risk involved, I wouldn’t invest hundreds of my hard earned cash. I believe it could be a good buy right now but wouldn’t lose sleep if it didn’t work out based on current levels.

More drilling for Helium One Global

But today’s completion-of-drilling announcement left shareholders feeling deflated. The drill bit had trouble verifying enough helium to make a voice squeaky. The company said it’s “encouraged” that it has identified a working helium system in the Rukwa Basin. But is “disappointed” not to have identified free gas within the Karoo Formation of Tai-1A.

And so it’s time to move on. The next step for Helium One Global will likely be more drilling “which may include redrilling of Tai prospect to test identified targets.” But exploration wells are expensive to execute. So it’s no wonder the share price fell on the news. It’s down by almost 50% today — ouch!

In some ways I view today’s lower share price as an opportunity. After all, the market capitalisation is now much lower at around £164m. And the move blew off some of the speculative froth from the price. But Helium One Global remains a highly speculative proposition and the company has very little to show for its exploration efforts so far. At least that’s true when measured against commercially exploitable assets.

Meanwhile, my attention is on Zephyr Energy (LSE: ZPHR). The company also delivered a completion-of-drilling announcement today. But the outcome of the firm’s exploration operations was far more positive than Helium One Global’s, and the stock is up by almost 15% on the news.

Zephyr strikes its target

The firm’s operations are in the Rocky Mountains region of the USA. And the State 16-2LN-CC well encountered its primary Cane Creek reservoir target “as well as multiple secondary targets in overlying reservoirs.”

The contrast with Helium One Global’s announcement is striking. Zephyr Energy said the Cane Creek reservoir target indicated hydrocarbon charge “across its entirety.” And the company set production casing in anticipation of upcoming completion and production testing activity. Chief executive Colin Harrington said the evaluation of the drilling logs is underway. And the company will keep shareholders informed of progress towards completing the well.

So far, 2021 has been a good year for Zephyr Energy shareholders. In January, the stock traded near 0.9p. And it’s since risen a long way to today’s price around 6.7p. But some impressive operational progress has driven the stock.

In 2020, a new management team moved in and restructured, refocused and rebranded the company. And the directors have clear ambitions to combine drilling success with carefully targeted acquisitions of distressed assets, including production capacity.

Zephyr Energy remains a speculative proposition and I could lose money on the stock. But at around £77m, it has a smaller market capitalisation than Helium One Global. And the idea of backing the winning horse attracts me which, in my view, is Zephyr Energy. The stock’s going on my watch list and I’m aiming to buy a few of the shares at opportune moments. Although I see the potential investment as quite risky.

i3 confirmed that the High Court approved the company’s plan to cancel its share premium account on Tuesday. This was the green light for the energy play to pay out a maiden dividend. The ex-dividend date for this is expected to fall during the week beginning 12 July.

In other news i3 has now executed a binding sales and purchase agreement for production from Canada’s Wapiti Elmworth acreage. The business announced plans to acquire 230 barrels of oil equivalent per day in mid-June with a view to boosting output to 310,000 barrels a day in the next year.

The total acquisition and capital cost will be $410,000, which equates to 0.56 times expected net operating income over the next 12 months. i3 predicts that the acquisition will complete during the third quarter.

A sinking UK oil share

Like that of i3 Energy, the Zephyr Energy (LSE: ZPHR) share price has also surged during the last 12 months. This UK oil share has increased 1,100% in value since this point last June. And it visited its highest since autumn 2017 at 7.85p per share this week.

Zephyr’s share price has plunged 14% on Wednesday to 6p, however, following the release of fresh drilling analysis. Zephyr — which invests in oil and gas projects in the Rocky Mountain area of the US — provided an update on its flagship project in the Paradox Basin, Utah. It said that analysis following the State 16-2 dual-use stratigraphic test well drilled earlier this year revealed that all 20 overlying reservoirs “are likely to be hydrocarbon filled to some degree”. Petrophysical analysis of several offset wells were also used to form this conclusion.

The company “has high-graded eight reservoirs which have adequate thickness for potential future development,” it said. And it added that the region could contain some 200 well locations across the eight overlying reservoirs. This depends on whether Paradox can be developed by way of a hydraulically stimulated resource play (HSRP). It’s a process that would allow broader project development across more than one reservoir.

“Cautiously optimistic and excited”

Zephyr chief executive Colin Harrington said that he was “cautiously optimistic and excited” about the findings. They indicate a risked contingent resource potential (net to Zephyr) of up to an additional 125m barrels of oil equivalent. This is based on an P50 midway estimate of around 1bn oil barrels on Zepher’s currently held acreage.

The UK oil share cautioned that “this estimate of the HSRP potential is preliminary and highly dependent upon developing better understanding of each zone’s reservoir pressure, fluid phase, geomechanical properties, permeability and a successful proof of concept hydraulic stimulation and production well.”

At the Paradox play, the design of a 61-square-mile 3D seismic survey has been completed. Dawson Geophysical Company, which specialises in seismic data, has been awarded the acquisition phase of the seismic programme.

Rose is seeking contractors to complete a well in the Gunnison Valley Unit, which should take place in Q4 this year.

At Mancos, a drilling decision has been made with the use of 2D seismic data. Again, a contractor is being secured, and the process of beginning to drill the well is anticipated in Q4.

Rose has identified a potential strategic acquisition in the Mancos project area. If the board determines that it is in the best interests of shareholders, then a deal — which would be funded from the proceeds of the company’s recent £6.5m fundraising — could be closed during Q4.

Two new appointments have been made as Rose commences the staffing of its US Oil & Gas technical team. David Patterson, who joins as vice president of geology, and Savilla Cribs, a geological engineering technician, have both started work at Rose’s new Denver office.

The chief executive, Matthew Idiens, commented:

“With the team now in place it’s all hands to the pumps and I am pleased with the progress we are making and the momentum now building on the operational front. I am confident we now have an experienced ops team is place to drive these projects forward. We look forward to drilling and completing our first wells later this year and we will keep the market posted in regards to how this progresses.”

Before making a trading decision, remember that micro-cap shares can be highly volatile, and make far riskier investments than established companies listed on the main market.