How to avoid penny stock rip-offs, and one to consider buying in October

I’ve been seeing a lot of UK penny stock headlines of late, some raising my eyebrows. But which are pump-and-dump pulp and which are honest and worthwhile?

There’s usually a plausible story behind even the scams. Artificial intelligence has been a key factor this year. And if I had a penny for every headline like “UK penny stock sure to soar in the AI revolution“… well, I’m sure I’d have more than if I’d bought the stocks.

Look closely

Here’s my first recommendation: check the publisher. There’s a lot of made-up names going round, trying to sound like genuine London or Wall Street financial publications. But words like ‘times’, ‘journal’, ‘herald’ etc in unfamiliar arrangements mean caution is needed.

If we don’t recognise it, search for the exact publication title. Has it been going a long time? Is it quoted by reputable sources? Does it have a record of in-depth investing analysis?

Next tip: check the stories themselves carefully. Are there any calculations based on results to back up share price claims? Are there any financial fundamentals there at all that we can check? Is there any reference to real analyst forecasts? Check any numbers against actual company results, and take a look at forecasts published for free by a number of financial sites.

Companies duped

I won’t name any of the companies I’ve seen touted recently. That’s because whenever we have a bout of this, there’s no suggestion the companies themselves are part of it. They’re usually just going about their businesses. And it’s unconnected third parties who bought cheap trying to pump up the prices so they can dump for a fat profit.

During what seems like a generation ago now, smaller oil companies were among the hottest growth prospects. It’s a business that’s always going to be risky — especially for ‘jam tomorrow’ stocks that are still exploring and haven’t made a profit yet.

But now that AI has eclipsed them as the go-to for growth (and for scammers), I reckon some are genuinely worth a closer look. Pharos Energy (LSE: PHAR) is one, even though its share price has been essentially flat for most of the past five years. And it’s actually dipped 12% so far in 2025.

Cheap penny stock?

Small-cap oil explorers — and the Pharos market cap is just £89m — often have erratic earnings. Exploration can easily cover a long timescale, with expenditure and profits often widely separated.

September’s interim results, for example, showed revenue of $65.5m, though the company did report a net loss of $2.2m. But operating cash flow of $16.1m coupled with $22.6m net cash at 30 June mean I don’t foresee any immediate liquidity problems. It’s a risk to watch for in the future though.

Low valuation

Analysts predict profit for the full year and put the stock on a forward price-to-earnings ratio of only 7.3. And they expect a dividend yield of 5.7%. After Pharos extended its Vietnam oil and gas rights out to 2032, I think it’s well worth considering now.

But I have one final caution, to show the way penny stocks don’t start off that way. In its previous identity as SOCO International, the share price climbed close to 600p — at the time of writing, it’s 21.5p.