Stock to Sell: ARM Holdings
While ARM Holdings (ARMH) doesn’t actually produce gadgets, it is the brains behind many smartphone chips. But as a “fabless” semiconductor manufacturer, it doesn’t make anything — it simply outsources its designs to other smartphone outfits.
Being a middle man means high margins and big royalties when the chips are in its favor … but the risk of serious disruption should alternatives come around for gadget makers.
Right now, ARMH enjoys a brisk five-year growth rate of more than 30%, but sales are cooling to around 17% annually this fiscal year and next. And those projections might not hold now that semiconductor giant Intel (INTC) has seen real design wins with its Atom system-on-chip line for tablets, sparking a big rally. INTC has delivered roughly 20% year-to-date returns in 2013 vs. a slump in ARM stock that puts it in the red since Jan. 1.
ARMH stock soared twelve-fold from 2009 to its 2012 peak, exploding from under $4 a share to about $50 last fall. But now, as is so often the case, it becomes an expectations game and a question of competition. There seems to be too much success priced in and enough disruption risk to make ARMH a bad investment right now.
Oh, and with a measly 0.5% dividend yield, you don’t have incentive to stick around and wait. So dump ARM Holdings if you still own it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aformentioned securities.