I own a few penny stocks in my Stocks and Shares ISA. Of them, one is now worth substantially less than I paid for it. On top of that, 2025 could potentially see things get worse not better.

So, was this a mistake for me to buy – and ought I to sell?

A challenging 2024 for a longstanding business

The share in question is Topps Tiles (LSE: TPT).

It is down in value by 23% over the past year and over half on a five-year timeframe. Ouch.

There are good reasons for the fall in the past year, in my opinion. Last year saw like-for-like revenues fall 9%. A £7m profit before tax the prior year turned into a £16m pre-tax loss.

The dividend per share was cut by a third. I think it is one of the reasons some investors hang onto the stock, so it is understandable that the board was loathe to axe it altogether.

Still, given the loss last year, I see a risk that the dividend could yet go to zero.

Might 2025 be any better?

Some of the reasons for last year’s poor performance could be just as bad – or worse – this year.

Weak demand in the tile market is a critical one. On top of that, the company’s acquisition of assets from bankrupt rival CTD last year (currently under investigation by competition authorities) divides investor opinion. Some see it as ill-planned and potentially not the most cost-effective way for Topps to build further scale.

I am more positive about that, seeing it as an opportunistic move that helps the business build credibility in areas adjacent to its main business, such as selling to architects.

Topps has a strong market position, selling one in five tiles bought across the nation. That came about as part of a concerted strategic push and it has another plan to grow its sales to around £1m per day on average.

Lots still to prove

But while sales are one thing, profits are what matter to investors.

Last week, Topps announced that in its most recent quarter, it had returned to sales growth. In the last 12 weeks of last year, like-for-like sales grew 5% year on year.

The chief executive has announced plans to stand down and any hiccoughs in succession and handover could add further risks to the company’s financial performance.

While I am happy about the return to sales growth, I will be keeping a close eye on the company’s interim results a few months from now to see whether it has also moved back into the black after last year’s losses.

Clearly there are multiple risks here. But I do not think buying Topps was silly. It remains a solid business in an area I expect to benefit from strong demand over the long run. So I have no plans to get rid of this penny stock from my portfolio.

Two days ago, Prime Minister Kier Starmer announced plans to “mainline” artificial intelligence (AI) “into the veins” of the UK to boost productivity in public services and fuel future economic growth. Looking at the details, I reckon two FTSE stocks could benefit from this ambition to make the UK an “AI superpower“.

FTSE 250

The first share is Kainos Group (LSE: KNOS). This is a medium-sized FTSE 250 technology firm that helps private and public sector organisations transform digitally. It specialises in the deployment of products from Workday, the cloud-based platform for HR and finance.

Kainos stock has performed well over the long term, but has more recently fallen on hard times. It’s now trading for 768p, which is 62% lower than the 2,052p price it was at in November 2021.

So how will Kainos benefit from the government’s AI proposals? Well, the IT provider has a strong track record of working with public sector clients, including the NHS and Department for Transport. So it’s already a trusted partner.

Plus, Kainos is already leveraging AI to benefit its customers. In the six months to September, it won nearly 40 AI & Data projects across the public, healthcare, and commercial sectors, taking the total so far to over 140. I expect that to motor much higher in future after the latest AI plans were announced.

Naturally, the firm faces a lot of competition to win contracts in this area, while public finances remain stretched. And it’s struggling for revenue growth right now in a challenging trading environment.

These issues are worth bearing in mind, as AI benefits aren’t going to happen overnight. Longer term, however, Kainos looks incredibly well positioned to benefit from these AI-driven public sector productivity plans.

With the stock trading at a fairly reasonable 19 times earnings for FY25 (which ends in March), and yielding 3.7%, I think it’s worth considering.

FTSE 100

Besides being powerful, AI is also notoriously power-hungry. Indeed, Big Tech’s energy consumption right now is outpacing entire countries!

To power his plans, Starmer also announced the establishment of an AI Energy Council to explore innovative energy solutions, including small modular reactors (SMRs). These are mini-nuclear reactors built in factories that offer scalable, low-carbon energy.

One of the frontrunners in developing SMRs is Rolls-Royce (LSE: RR). The FTSE 100 firm has a dedicated subsidiary and this venture remains in pole position to win a competition to deploy SMRs across the UK.

In September, Rolls-Royce SMR was selected by the Czech Republic as its preferred supplier for mini reactors. It said this “strengthens Rolls-Royce SMR’s position as Europe’s leading SMR technology”.

Unfortunately, it will be the early 2030s before this technology begins to be deployed widely. And despite the outcry it would cause in the UK, it’s possible Rolls-Royce isn’t chosen this year as one of the two winners from four contenders.

Meanwhile, the FTSE 100 stock isn’t cheap after surging 86% in a year. It’s trading at 26.5 times this year’s forecast earnings, which is quite pricey.

Nevertheless, the long-term opportunity appears massive. According to estimates, the global SMR market could top $295bn inside 20 years. This will be driven by European nations aiming to reach net-zero targets and rising energy demand from AI data centres.