As readers of the Fool will be well aware, value investing entails buying shares in good quality companies at reasonable prices. One common measure used by value investors is the price-to-earnings (P/E) ratio, with a lower output generally being more attractive than a higher one.
Furthermore, according to various studies in recent years, value investing outperforms growth investing in the long run. Certainly, shorter time periods may differ but a focus on buying high-quality companies at sensible prices seems to be a logical and successful way of investing for Fools like us.
As a result of an unrelenting focus on price, investing in the technology sector proves to be a big ask for value investors, since tech companies often come with extremely high P/Es. Indeed, the current P/E of the sector is a whopping 34; more than 2.5 times more than that of the FTSE 100.
However, within the tech sector is a gem of a company: ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US). It develops and licenses processor and other technology designs that leading semiconductor companies incorporate into silicon chips. Companies that have licensed its products (for which ARM receives both a fee and royalty payments) include AMD and Samsung.
Of course, as a tech company, ARM trades on a sky-high P/E of 79 but this figure has been a lot higher; notably peaking at 94 in 2011. Furthermore, earnings per share is forecast to grow at between 20 and 30% per annum over the next three years, meaning the P/E ratio does not necessarily have to increase in order for investors to make a profit.
Indeed, should growth rates of 20%+ be realised over the next three years, investors in ARM could still realise a substantial profit even if the P/E ratio were to fall. Although hardly good value at the moment — in the eyes of value investors — a P/E ratio of 79 may prove to have been more than reasonable when we look back in 3 years time.
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> Peter does not own shares in any company mentioned in this article.
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