Image source: Getty Images
By knowing which stocks to buy, investors can unlock phenomenal returns. Even more so when it comes to penny stocks, which have the potential to skyrocket under the right conditions.
Of course, identifying winning businesses before the surge is far easier said than done. But wouldn’t it be great if an artificial intelligence (AI) could do it for me?
With that in mind, I asked ChatGPT for its opinion on which companies might be the “perfect” penny stock to buy right now. And it came up with a pretty interesting response…
Boring but dependable?
ChatGPT’s choice fort the perfect buy is Ultimate Products (LSE:ULTP) – the homewares company behind brands such as Salter, Russell Hobbs, and Beldray.
When I asked why it thinks this is a winning business, ChatGPT responded with an argument that, on the surface, seems quite valid.
It highlighted that, unlike most penny stocks, Ultimate Product is profitable. It has an easy-to-understand retail business model. The balance sheet only carries modest debt. The stock trades at a modest price-to-earnings ratio of 9.2. And the dividend yield’s a tasty-looking 6.6%.
This all sounds rather promising. Except it seems ChatGPT’s overlooked one glaring critical factor – the company’s in freefall.
Collapsing profits
With inflation and higher interest rates ravaging household budgets, demand for premium and branded homeware products has collapsed. And Ultimate Products has experienced the consequences of this first-hand.
In the 12 months leading to July, pre-tax profits have taken a 44% haircut, dividends were slashed in half, and the group’s net-debt-to-EBITDA ratio is now above target.
What’s more, looking at the latest analyst projections, it doesn’t seem like things are expected to get much better. In 2026, the earnings per share are expected to fall once again to 5.38p from the current 6.8p – another 21% tumble.
Combining all this, the CEO is receiving a chunky pay increase despite the bleak performance, and it’s not surprising that most investors are fleeing. And as such, the stock has tumbled by over 50% in the last 12 months. Needless to say, this is hardly what I would call “perfect”.
A glimmer of hope?
This serves as a good example of how relying solely on the recommendations of AI tools like ChatGPT is an excellent way to potentially set money on fire. But could Ultimate Products be a hidden recovery opportunity?
There is some room for rebound optimism. The downturn in sales and profits appears to be cyclical rather than structural, and the company’s brands are still popular household names.
That certainly gives the business a bit of an advantage once economic conditions improve. And to management’s credit, they are taking action to try and offset the impact on margins through automation and AI.
But there’s still a lot of work to do. And with leverage already exceeding targets alongside the projections of further cash flow compression in 2026, this penny stock may yet fall even further. That’s why I’m ignoring ChatGPT’s recommendation and looking for other, less risky and more promising stocks to buy within the micro-cap space.
