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 (Nasdaq: ARMH) reported fourth-quarter and full year results last week, easily surpassing analyst expectations and sending ARM rocketing skyward once again. This has been a common theme in the year and a half I've owned the stock. But every time it happens, the same thoughts run through my head: Maybe this is the time to lock in those profits. Don't get me wrong -- a run up in a stock is not a reason to sell by itself. And ARM is a fantastic company with an innovative business model that offers advantages over a typical semiconductor company. But when I look at valuation, it can be difficult to justify.

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 (Nasdaq: INTC) has historically been the leader at designing and producing the most powerful chips for computers, ARM's efficiency made it a big player in smartphones, where there has to be a delicate balance between power and maximizing battery life. The company designs many of the chips produced by major semiconductor companies such as Samsung, NVIDIA (Nasdaq: NVDA), and Qualcomm (Nasdaq: QCOM). Only recently has Intel entered this market with its Atom chip, setting the stage for a showdown for control of the tablet/smartbook market.

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 (Nasdaq: AAPL) iPad -- with its ARM-based processor -- has revolutionized the industry and opened up another opportunity in tablets. The dream scenario has occurred, but will it keep accelerating fast enough to justify these valuations? The obvious risk with any stock that has risen this quickly: It only takes one misstep to send the shares plummeting downward.

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 (Nasdaq: MSFT) that the next version of Windows will support ARM based microprocessors. That doesn't mean buying and forgetting -- I'll still stay on top of every earnings release, press release, conference call, you name it. But based on their most recent release, it appears that ARM is hitting on all cylinders and its potential is limitless. And as CEO Warren East pointed out in the Q4 conference call, ARM still generates 90% of its royalty revenue from licenses sold in 2006 and before. Given strong recent licensing activity, the future looks bright.

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.

Fool contributor Stephen J. Marini owns shares of ARM Holdings and Intel. Intel and Microsoft are Motley Fool Inside Value selections. Apple and NVIDIA are Motley Fool Stock Advisor picks. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.