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What You Were Buying Last Week: ARM Holdings plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Market-beating growth

ARM (LSE: ARM) (NASDAQ: ARMH.US) — the world-leading designer and licenser of semiconductor technology — has rewarded long-term shareholders extremely generously. ARM’s share price has risen almost 850% over the past five years, during which time the FTSE 100 has increased by less than 25%.

That sort of growth might be reason enough to worry that the party might soon be over.  But it didn’t deter some people from buying ARM shares last week, putting it into the number 5 spot in our latest “Top Ten Buys” list*.  They clearly expect ARM to continue to deliver market-beating growth.

Last week’s half-year report from ARM held mixed news. On the downside, pre-tax profit plunged a whopping 73%, blamed on a variety of factors, including £42m of costs for “IP indemnity and similar charges, Linaro-related charges and share of results in joint venture and disposal and impairment of investments“.  But on the bright side, revenue had increased 24%, there was record cash generation of £96m in Q2, and there was also a record order backlog.

Some analysts have raised worries that the slowdown in sales by Apple — ARM’s biggest single customer — would inevitably affect ARM’s earnings. But last week’s buyers will have taken comfort from the fact that when Apple published its third-quarter results last Tuesday, they revealed that whilst almost 15% fewer iPads were shipped (down to 14.6m units), iPhone sales hit a quarterly record of 31.2m units, up some 20% on last year’s figure. Even so, shareholders old and new will be hoping that Apple will unveil some new products soon — products that will need technology licensed from ARM.

There have also been growing concerns that ARM’s long-standing dominance of the “mobile processor” market will finally be challenged by Intel. But, even if Intel does make in-roads into ARM’s territory, with sales of “smart” devices set to continue growing, as demand for them explodes in emerging and developing economies, there should still be a very large cake for both companies to share for quite some time to come.

Valued on a traditional metric such as P/E ratio, ARM has long been priced at a considerable premium, in the expectation that its dramatic growth will continue. And perhaps with earnings forecast to grow by over 40% for 2013, the premium might still be justified — last week’s buyers presumably think so.

But of course, no matter what other people were doing last week, only you can decide if ARM really is a ‘buy’ right now.

A high-quality growth share

If you’re looking for another high-quality share with great potential, you’ll definitely want to know which company The Fool’s expert analysts have picked to feature in The Motley Fool’s Top Growth Share For 2013 report.

It’s completely free of charge, and there’s no further obligation, so get your copy delivered to your inbox now!

> Jon doesn’t own shares in ARM.

* based on aggregate data from The Motley Fool ShareDealing Service.