Is ARM Holdings the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if ARM Holdings (Nasdaq: ARMH  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at ARM Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 11.8% Fail
  1-year revenue growth > 12% 33.3% Pass
Margins Gross margin > 35% 93.6% Pass
  Net margin > 15% 21.1% Pass
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 2.42 Pass
Opportunities Return on equity > 15% 10.5% Fail
Valuation Normalized P/E < 20 115.62 Fail
Dividends Current yield > 2% 0.5% Fail
  5-year dividend growth > 10% 28.1% Pass
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

ARM Holdings scores a very respectable score of six. Its future, however, could become a lot brighter as the company makes big waves in a business dominated by some of the world's largest companies.

For years, two players have dominated the PC industry: Microsoft with its operating system software, and Intel (Nasdaq: INTC  ) with its processors. With their chokehold over the computers that most people used, those two companies made life hard for also-rans such as Advanced Micro Devices (NYSE: AMD  ) , which was relegated to making processors that piggybacked off Intel's instruction set, and other companies were unable to crack the processor market.

But recently, Microsoft announced that it's building a version of Windows that runs on platforms used by ARM Holdings' processors. As a result, ARM Holdings is challenging Intel not just for mobile devices but also in Intel's core PC market.

Meanwhile, the company has made serio us inroads in the booming mobile industry. ARM has made licensing deals with Broadcom (Nasdaq: BRCM  ) to pair up on chipsets for low-cost smartphones for the global market, as well as seeking a place in higher-end devices from Apple (Nasdaq: AAPL  ) and licensing deals to a group of major chip companies that includes stalwarts such as Texas Instruments (NYSE: TXN  ) . Moreover, it has a vital partnership with IBM (NYSE: IBM  ) helping ARM keep up with the latest technological innovations.

At more than 100 times normalized earnings, ARM isn't cheap. But if the company can stay on its current growth path, its financial performance could easily justify its current valuation. If you're willing to make a speculative play, ARM Holdings may be the perfect stock to do it with.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add ARM Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Intel and Microsoft are Motley Fool Inside Value selections. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on Apple and diagonal call positions on Intel and Microsoft. The Fool has written puts on Apple, bought calls on Intel, and owns shares of Apple, IBM, Intel, Microsoft, and Texas Instruments. Motley Fool Alpha LLC owns shares of Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2011, at 3:16 PM, techy46 wrote:

    ARMH gets $.01-.02 perprocessor from their licensees while Intel makes 40-50% of their processors. ARMH is overpriced.

  • Report this Comment On April 07, 2011, at 6:24 PM, frankinCA wrote:

    ARM is a reasonable product for small systems processing, but the Atom, Analog Devices shark and texas instruments processors are competitors for small systems and portable devices. ARM is like the Intel of small processors and the various forms of processor using their instruction set and physical structure are used extensively because of the many software developers using this device. It has no special characteristics on its own, just an easy software activated device.

    AMD is not a piggyback of Intel and uses the code that all large systems use because of Windows and it's use exclusively of the X86, X64 instruction set. AMD was given a license by Intel to use it's instruction set because they wanted access to some hardware patents and also needed to avoid SEC monopoly problems. AMD's Opteron, cpu memory manager and cpu/gpu integration via their combining with ATI, were initiated by AMD, after which Intel has followed in their own way. Intel's claim to fame is die size 32, nm or less and their illegal marketing prowess which got them fined by the EU and the US courts and a billion dollar settlement with AMD .AMD is the David, and Intel is the Goliath of large scale CPU designers and manufacturing.

    If Apple doesn't buy them out, then I am sure China will make it's play for them, since they need more financial backing to stay ahead of Intel in design and function capability.

  • Report this Comment On April 07, 2011, at 6:55 PM, frankinCA wrote:

    for a metaphorical approach. of Intel and AMD, I would suggest Intel is Gold and AMD is Silver. Gold has little use outside of jewelry and super corrosion resistance. Silver is jewelry, photography, anti-bacterial agent ,solar cell conductor and high discharge battery component used in torpedoes and future cars to provide the extra acceleration needed in emergencies or ?

    Take your choice, I am a Silver buff as you can see.Couer mining and Inmet are my favorites . For rare earths it is LYSDY. Try

  • Report this Comment On April 08, 2011, at 1:46 AM, beetlebomb4 wrote:

    Cover both bases... gold and silver with GG

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