Penny stocks are high-risk investments, so they’re not for everyone. However, if someone has the risk tolerance, they can be worth considering as part of a diversified portfolio given their potential for strong gains.
Here, I’m going to highlight a penny stock that I hold in my portfolio today (it’s the only such stock I currently own). I see a lot of potential in this one and so do City analysts.
A tiny company
The pick I want to highlight is Calnex Solutions (LSE: CLX). It’s a leading provider of telecom network testing products and services.
It currently trades for 63p. At that share price, its market cap is around £55m, so we’re talking about a very small company.
Long-term growth potential
Now, I’ve held this one for a few years now, and it has been a wild ride (as is often the case with penny stocks). At one stage, I was sitting on great profits, yet today I’m in the red.
What went wrong? Calnex’s revenue and profit growth suddenly slowed on the back of a slowdown in telecoms industry spending – this hit the share price badly.
I continue to believe that the stock can deliver strong returns, however. For a start, I expect telecom network testing to pick up at some point. Today, 5G networks are still very primitive in many parts of the world. Here in the UK, I can’t even get 5G reception in many parts of London!
Secondly, the company has recently been moving into new markets such as defence, cloud computing, and satellites. I suspect the defence market may provide some compelling opportunities for the group in the years ahead, given that many European countries are ramping up their defence spending significantly.
It’s worth noting that in a recent AGM Statement the company stated that growing traction in the cloud and defence markets provides the board with confidence that performance this financial year (ending 31 March) will be in line with market expectations (analysts currently expect revenue growth of 11%). It added that because it now operates in a range of end markets, it’s not reliant on a recovery in the telecoms market for growth.
High risk, high reward
Now, I need to stress that this is very much a high-risk stock. Profits have tanked in recent years and there’s no guarantee that they’ll recover (they could fall further).
I think it’s worth at least taking a look as a high-risk, potentially-high-reward play, however. If earnings do pick up, the share price could fly and it has already started to move higher recently.
I’ll point out that founder and CEO Tommy Cook owns 20% of the company’s shares. So, it’s in his interests to kickstart growth and get the share price firing again.
Note that analysts at Canaccord Genuity currently have a 115p price target on the stock. That’s roughly 83% above the current share price.
