Typically, penny stocks carry a higher level of risk than larger stocks. Therefore, I need to do more detailed research when looking for sharp options. On this occasion, I thought I would ask ChatGPT’s AI chatbot what it thinks is a good choice right now, with a surprising result.

A controversial choice

ChatGPT selected Enwell energy (LSE:ENW). This is an oil and gas exploration company operating exclusively in Ukraine. The company’s stock has fallen 10% over the past year.

It generates revenue in the same way as many energy companies. Once a recent location is found and made commercially viable, the sale of natural gas provides revenue for the company.

However, a massive problem is the suspension of part of the company’s license by the Ukrainian authorities. They were suspended a year ago, and although Enwell is pursuing legal challenges, it does not appear that much progress has been made so far.

As for the rationale for selecting Enwell, ChatGPT noted that the group had initiated arbitration over the suspended assets. He demands reinstatement and monetary compensation. If the arbitration is successful, it would significantly change Enwell’s cash flow prospects and valuation. The AI ​​bot believes it is a classic small-cap catalyst with high growth potential, which is why it was selected.

I’m trying to get on board

I’m really not sure about this penny stock pick. First, oil and gas exploration companies are highly volatile. They often rely on huge amounts of debt and funding to explore projects, hoping to achieve success in a particular case. For Enwell, second-quarter data showed zero production during the summer. It simply does not operate unless it finds recent locations outside Ukraine or resolves the situation in the country.

Moreover, penny stocks are already high-risk investments without the addition of those operating in an busy war zone. While we all hope for peace in Ukraine, it is impossible to set a date. So I don’t see how any resolution to get recent licenses will be a priority. Even if they do take it, can the company truly maximize its potential when there is a threat from enemy troops nearby?

Of course, I could have missed the point here. At the end of September, the company had cash resources of USD 99.9 million. Therefore, it can continue operating for some time even without generating profit. Additionally, I am looking for small-cap companies with huge potential. So it’s likely that if Enwell’s problems are suddenly resolved, the share price will skyrocket amid the optimism.

Ultimately, Enwell is too risky for me to consider investing. For others with a greater tolerance, this may be something worth considering. But I think it shows how AI can sometimes miss the mark when it comes to risk management without looking at the bigger picture.