I have a problem. It's certainly not the worst problem; in fact, just the opposite. One of my stocks has risen significantly since I bought it -- beyond any reasonable expectation of return. So what do you do in this situation? It may be a good problem to have, but that doesn't make it any easier to solve.
ARM Holdings
What ARM does
ARM Holdings designs and licenses intellectual property to a broad base of customers in the semiconductor industry. The company estimates that every semiconductor company would have to spend between $50 million and $150 million -- which represents $20 billion annual cost to the industry -- to replicate what ARM does. ARM is akin to an outsourced R&D supplier which specializes in maximizing power efficiency. Where Intel
Back to my conundrum
My shares have risen to more than four times my original purchase price. While I would typically analyze the company against its historical metrics and consider whether any changes have occurred in the business, that really doesn't help here. The business is the same and ARM is trading at 97 times earnings, 65 times next year's earnings! Even when using the company's "normalized" earnings, it's still north of 60, which doesn't facilitate easy historical comparisons.
A common strategy for determining when to sell is to consider why you bought it in the first place, and assess whether that has changed. My thought process at the time was simply a bullish view of light, mobile devices of all kinds. What made it even more compelling was that ARM is so entrenched in smartphones, that even if I was wrong, the smartphone should continue to sustain their business. So now here we are, 18 months later, and Apple's
What I've done so far
I currently hold half of my original position in ARM, selling a quarter in September and then another quarter in January. A quick look at a chart would show that I left quite a bit of money on the table there (ouch), but I guess hindsight is always 20/20. The good news is that I have now locked in a significant profit, and I have plenty of skin still in the game. I also eliminated much of the volatility in my portfolio; ARM had gotten so large that its movements would often make or break my returns.
What I plan to do
I think now I'm just going to sit tight. In my view, ARM has too many positive factors going for it, including the recent announcement from Microsoft
Share your thoughts in the comment field below on how you handle these situations. Would you sell it all? Never sell share? Employ some other Foolish strategy? While this is my current strategy for ARM, it's certainly not a one size fits all approach.