Stocks for the Long Run: ARM vs. the FTSE 100

LONDON -- If the long-run return on the market is 9.4% (as researchers at Credit Suisse say), investing in shares should be a no-brainer. Somehow, however, all too often our portfolios don't seem to reflect that attractive performance.

This is partly because that 9.4% number is an average derived from 100 years of data. Picking various time periods within that 100 years gives very different outcomes -- and the market almost never actually returns 9.4% in any single year.

Needless to say, unless you're holding a market tracker, your portfolio could have dramatically different results than what the market experiences. If you own a disproportionate amount of winning shares, your returns could be significantly better than the market. On the other hand ...

In this series of articles, I'm looking at how individual shares have performed against the FTSE 100 (UKX) during the past 10 years. Today, I'm assessing computer chip designer ARM Holdings (LSE: ARM.L  ) (Nasdaq: ARMH  ) .

Over the past decade, ARM's performance has far surpassed that of the FTSE 100.

Source: S&P Capital IQ.

Since October 2002, ARM's shares have had an impressive average annual return of 29.5% -- far outstripping the FTSE 100's 7.4% annual average (these return calculations assume dividends were reinvested).

Of course, share price is one thing, valuation another. So how has ARM compared on a valuation basis over the years? ARM has traded on an average price-to-earnings (P/E) ratio of 44 over the past 10 years -- not exactly what most investors would call a value rating when compared to the FTSE 100's average of 13.

Sources: S&P Capital IQ and Bloomberg.

Of course, the past is history, and investors must ask themselves what they think the future holds for a company. Can ARM continue to grow earnings at the 28% rate it achieved last year and for the past five years?

To do so, ARM will not only need to maintain its dominance in the mobile computing market but also see its chips adopted in a broader array of consumer electronics. Management sees great opportunity in the "Internet of things" -- smart electrical grids in which appliances and devices are in constant communication to increase efficiency and reduce energy consumption. Do you?

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Nate Weisshaar owns no shares mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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10/30/2014 3:59 PM
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ARM Holdings CAPS Rating: **

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