Most investors don’t buy small caps through an index, it’s much more of a stock picker’s playing field. This is why opportunities can be spotted even in the face of lacklustre performance overall.

While fund managers have been calling the turn for smaller companies all year with little success, Shares believes it has uncovered a good investment opportunity to buy into a fantastic ‘made in the UK’ technology business at an attractive price.

At the start of 2023, Calnex Solutions’ (CLX:AIM)shares traded at 194p, having braved pandemic markets by listing its shares on AIM in September 2020 at 48p. The stock now changes hands at a 38% discount to January’s price.

Before we get into why, let’s explain what Calnex is. The Scotland-based company is a global leader in the telecoms network testing space with a distinguished list of customers.

It serves businesses all over the world and across the communications value chain, with leading customers including BT (BT.A), Ericsson (ERICB:ST), Nokia (NOKIA:HEL), Intel (INTC:NASDAQ), and more recently, hyperscale cloud computing providers.

Calnex won its first significant order last year with Facebook-owner Meta Platforms (META:NASDAQ). FTSE 250 telecoms testing kit expert Spirent (SPT) is a major partner and sales channel for Calnex equipment.

Expanding products and services beyond its core next generation mobile networks and superfast broadband into other high-growth sectors, like cloud computing, data centres, and applications testing, has been a major driver of growth in recent years.

Profitable and cash generative, it puts capital to very good use, with return on capital employed, Fundsmith boss Terry Smith’s favourite financial metric, averaging 25.7% over six years.

So, why have the shares been weak? It’s down to major customers delaying investment thanks to recession fears. This saw March 2024 forecasts slashed earlier this year, and the share price to fall from 171p to 117p. Component supply chain problems didn’t help, although these have largely tailed-off.

There’s not much Calnex can do about macroeconomic trends, but it does imply there is nothing fundamentally wrong with the business, and that it has substantial recovery scope.

Calnex has already said its mid-term pipeline strengthened in the first quarter of fiscal 2024, while it remains exposed to many of the world’s mega growth trends.

By the start of 2024 we could be looking ahead to 2025 expectations of around 7p of earnings per share, the original 2024 forecast, implying a price to earnings multiple of 17, about a 40% discount to the pre-warning PE ratio. That could see 50%-odd share price upside over the next 12 to 18 months.

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