Many growth stocks have suffered in this year’s sell off. But when markets get rocky, I often find the cream rises to the top.
The company I’m looking at today is tech firm Calnex Solutions (LSE: CLX). This Scottish firm makes network test and measurement equipment for the 5G and cloud computing industries.
Calnex only floated in 2020, but its shares have tripled since then. I think this business could still offer an exciting opportunity for growth investors.
Why I like Calnex
Calnex’s sales have grown from £8.4m in 2018 to £22m in the 2021/22 financial year. The company’s after-tax profit has quadrupled from less than £1m to £4.5m over the same period.
The UK market has quite a few good engineering companies, but very few of them are growing this strongly. What makes Calnex different? I think that one core reason for the group’s rapid progress is that its products are focused on two big growth markets — 5G and cloud computing.
Calnex specialises in systems used for network synchronisation and network emulation. Without going into too much detail, synchronisation is required between 5G mobile base stations to within 0.000000001 of a second (yes, really) to provide seamless coverage.
Network emulation is required for testing networks by simulating their behaviour under real-world loads. The rapid growth of cloud computing and data storage has created new demand for this kind of testing.
One other big attraction
There’s one reason why I think Calnex could be a better bet than many other UK technology stocks. The company’s founder, Tommy Cook, is still chief executive and owns 20% of Calnex shares. In my experience, companies led by owner-managers often outperform the market over the long term. It’s not hard to see why.
Hired management are often focused on short-term goals and triggering bonus payments.
On the other hand, founders are more likely to have an interest in the long-term growth of the business. They care about the business they’ve created and they want to maximise its long-term success. This often leads to good results for shareholders too.
Would I buy Calnex shares today?
Unfortunately for new investors, Calnex’s success means the shares are not cheap. Broker forecasts for the 2022/23 financial year price the stock on 26 times earnings. This P/E multiple falls to 23x earnings in 2023/24.
The main risk I can see here is that any slight disappointment could trigger a big sell-off. Although it’s normal for successful businesses to have occasional blips, the UK market is pretty unforgiving at the moment.
However, the company’s latest update was pretty reassuring. Despite fears of component shortages, Calnex has been able to keep up the pace of its deliveries without any delays. Looking ahead, the group’s order book is also at “record” levels.
I think Calnex should be able to deliver organic growth and expand through acquisitions. In my view, this could be a much bigger business in 10 years. For this reason, I’d consider buying the shares today, even at a high valuation.
