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This stock produced 8 times the return from the FTSE 100 last year. And it’s still rising!

Young brown woman delighted with what she sees on her screen
Image source: Getty Images

The FTSE 100 had a decent year in 2022, all things considered. Including dividends, the index produced a return of just under 5%. There were many British stocks that produced far higher returns, however. Calnex Solutions (LSE: CLX) – which I own in my portfolio – is a good example. Last year, it delivered returns of around 40%.

What’s interesting about Calnex is that it has continued to significantly outperform the market in 2023. Year to date, it’s already up about 13% versus the Footsie’s gain of around 3.5%. Clearly, it has a lot of momentum at present.

Is it too late to buy this growth stock? I don’t think so. Here’s why.

In the right place at the right time

Calnex is a Scottish company that specialises in testing and measurement services for telecoms networks.

And right now, it’s doing very well due to the global rollout of 5G network technology and the expansion of the cloud computing industry, both of which are creating high demand for network testing services.

This is illustrated by the company’s first-half results for FY23, which were published in November. For the six months to the end of September, revenue was up a whopping 38% to £12.7m. Meanwhile, diluted earnings per share were up 34% to 2.67p.

Long-term growth potential

Looking ahead, I suspect this momentum is likely to continue.

According to Technavio, the global 5G testing equipment market size is estimated to grow by around 8% per year between now and 2027. That’s a very healthy level of growth and it should provide powerful tailwinds for Calnex, which provides services to many of the biggest players in the industry.

It’s worth noting that in the company’s H1 results, management said that the group is in a “strong position” to continue to benefit from the underlying long-term growth drivers in the telecoms and cloud computing markets.

The 5G vision for the telecoms infrastructure is extremely complex and will see a long-term transformation of the telecoms market, creating the need for test and measurement equipment to prove that new systems operate effectively and conform to rigorous international standards.

Calnex Solutions

High-quality business

As for the stock’s valuation, the forward-looking price-to-earnings (P/E) ratio here is currently about 28.

That’s well above the UK market average. However, I don’t think it’s excessive given these factors:

  • Revenue growth – Calnex has more than doubled its revenues over the last three years

  • High level of profitability – this is a very profitable company with a high return on capital

  • Balance sheet – it has minimal debt on its books

  • Management – the company was founded by Tommy Cook who’s CEO today (and owns a lot of stock)

Put simply, this is a high-quality, founder-led company with significant growth potential. So it deserves a higher valuation, in my view.

I’m bullish

It’s worth pointing out that Calnex is still a very small company. Currently, its market cap is only £164m. The share prices of companies this size tend to be quite volatile. While I think the stock can keep rising over time, I’m not expecting it to rise in a straight line. After the strong run it has had recently, there’s always the chance of a pullback.

Overall, I’m very bullish on the stock though. If I didn’t already have a substantial position here, I’d be buying it today.

The post This stock produced 8 times the return from the FTSE 100 last year. And it’s still rising! appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Calnex Solutions Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023