When it comes to finding UK shares with the potential for strong long-term growth, I’ve found that it can pay to look at smaller companies. In this area of the market, many companies are growing rapidly and generating big returns for investors in the process.
Here, I’m going to highlight two small-cap UK stocks I own. I think these two shares have the potential to generate big returns in the long run.
A 5G stock with huge growth potential
The first UK small-cap stock I want to highlight is Calnex Solutions (LSE: CLX). It’s a leading provider of testing equipment and services to the telecommunications sector. Calnex has an impressive list of customers, which includes the likes of BT Group, Ericsson, Qualcomm and Intel.
The reason I’m bullish on CLX is that the 5G vision for the telecommunications industry is extremely complex and is likely to require a huge market transformation. Calnex should benefit from this as it’s likely to create high demand for testing and measurement services. Before new technologies such as autonomous vehicles can be rolled out, networks will need to be tested rigorously.
Calnex’s full-year results for the year to 31 March were very strong. For the period, revenue was up 31% while adjusted diluted earnings per share lifted 42%. Looking ahead, CEO Tommy Cook said he sees a “significant opportunity” for both organic and acquisitive growth in the medium term and that he looks to the future with confidence.
Now it’s worth noting the company’s near-term growth could be a little subdued. That’s because last year, a number of customers brought their orders forward. If growth is disappointing, the stock could underperform.
However, I’m not too concerned by this risk. I’m convinced the long-term growth potential here is significant. And with the stock trading on a forward-looking P/E of less than 30, I think it’s a great time for investors like myself to be building a position.
A top UK FinTech stock
Another small-cap UK stock I own and very bullish on is Alpha FX (LSE: AFX). It’s an under-the-radar company that offers foreign exchange (FX) risk management and payment processing solutions for businesses. Its customers include ASOS, Halfords, and Abercrombie & Kent.
Alpha FX is seeing high demand for both its FX management and its payment services right now and this is translating to strong revenue and profit growth. Between 2017 and 2020, revenue climbed from £13.5m to £46.2m, while net profit surged from £4.4m to £12.5m. A trading update for the first half of 2021, posted last month, showed further growth with revenue up 89% for the period.
Looking ahead, analysts expect Alpha FX to keep growing at a rapid clip. This year, revenue is expected to come in at £67.3m, while next year, the top line is expected to hit £79.2m.
One risk to consider here is that FX activity is linked to global trading activity. An economic slowdown could reduce demand for the company’s services. The stock’s valuation (forward-looking P/E of 36) also doesn’t leave much of a margin of safety.
I’m comfortable with the risks however. I think this UK stock has the potential to deliver big returns for me in the long run.
