AI bot ChatGPT has grown like wildfire since being unleashed into the digital wilderness in late 2022. Even Ireland’s newly appointed minister for AI oversight reckons she’ll get round to using it one day! Recently, I asked the chatbot to name me penny stocks to buy.

Let’s see what it spat out…

Houston, we have confusion

ChatGPT Plus is comfortable rattling off blue-chip stocks like Rolls-Royce and Nvidia to consider. My theory is that it just goes by the largest listed companies whose share prices have been performing strongly and names them.

But it seemed to have a problem coming up with UK penny stocks. Two it named weren’t even penny shares at all, based on the widely-used definition of a market cap beneath £100m and share price below £1.

The first was Foresight Group Holdings, an investment manager with a £433m market cap and £3.75 share price. Moreover, this firm is a member of the mid-cap FTSE 250 index!

Granted, the London Stock Exchange is struggling with delistings and attracting new IPOs. But if the FTSE 250 had to start including sub-£100m market cap penny stocks to make up the numbers, then times really would be hard.

The bot’s second pick was less off-mark, as it went with Secure Trust Bank. However, while the market cap is £84m, this bank’s share price is even higher (£4.45).

The AI assistant had a bit of an amusing meltdown when I pointed this out, finally stating that my set task “can be challenging, as these parameters often result in a limited selection“. Of course, this is nonsense, as the UK market contains loads of penny stocks.

Finally, a stock

Anyway, with a bit of cajoling with the prompts, I finally got it to name me one a bit closer to what I was asking for. It went with Renold (LSE: RNO).

Now, the market cap here is above the technical threshold at £114m, but I didn’t want to quibble any more.

Renold is a manufacturer of industrial chains, gearboxes, and related power transmission products. According to ChatGPT, the firm’s “global presence, innovative product offerings, and strategic acquisitions position it well to capitalise on trends such as onshoring, re-industrialisation, automation, and defence“. Sounds good to me.

Renold stock is up 247% in five years, yet still trades very cheaply. The forward price-to-earnings multiple for FY26 (starting in April) is just 5.7.

It also points out that analysts have set a median 12-month price target of 88p, suggesting potential gains of 75% from its current 50p. Well-spotted, though I’d add that price targets often don’t come to much.

One thing it fails to mention is that the company has quite a bit of debt on the balance sheet (around £42m net debt). So this adds a bit of risk here.

ChatGPT ends with: “Investors seeking exposure to a resilient UK industrial firm with growth potential may find Renold an attractive consideration.”

I’d second that. In fact, I wrote in July that Renold was a “small-cap stock is worth considering” as its “profit margins are expanding“. Earnings per share are expected to rise around 39% next year.

I agree with the bot. I think Renold is a very cheap small cap worth considering and have put it on my watchlist.