Why ARM Holdings plc Is More Attractive Than J Sainsbury plc

Growth at ARM Holdings plc (LON: ARM) beats questionable recovery potential at J Sainsbury plc (LON: SBRY)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

If we swim with the current rather than against it, we are likely to cover more distance during the time we spend swimming.

That analogy describes the advantage that ARM Holdings (LSE: ARM) enjoys over J Sainsbury (LSE: SBRY) — the strong flow of the booming tech sector carries ARM Holdings along, while J Sainsbury struggles against an outflow in the supermarket sector.

Stacked investor advantages

It’s hard enough to get investing right without adding the disadvantage of investing in a weak and declining sector, such as the supermarket sector now.

One of my investing influences is the controversial Jesse Livermore, who was an active trader during the first decades of the twentieth century. He is controversial as a guru because he made, then lost, his fortune on the stock market several times before ultimately losing, going bust again, and then committing suicide. It’s easy to dismiss him on that record but, actually, he left a lot to teach us.

Jesse Livermore recommended going with the strongest company in the strongest sector, and I think that’s good advice. It’s no accident that I chose ARM Holdings and J Sainsbury to compare. Both firms are the strongest and best firms in their sectors as represented in the FTSE 100, in my opinion. However, one sector is growing and one is declining. Jesse Livermore urged us to stack as many advantages in our favour as possible before investing and, on that point, ARM Holdings wins.

Why the flow has turned against the supermarket sector

The rout in the UK supermarket sector continues at pace in the face of competitive pressures from deep-discounting competition such as Lidl, Aldi and others. It’s more than just that, though. Supermarket customers seem sick of being treated as gullible fools by the big players in the supermarket sector. At least that’s how it feels to me. Now those big supermarket chains face a rebellion from their own previously loyal customers.

One of the main areas of discontent, and now one of the main battlegrounds, is the own-label arena. For decades, the big players have seemingly been committing vast amounts of resource to the art of deception. You know the kind of thing: packaging that tapers from the top down, to apparently give the impression that we are buying more of a food stuff than we actually are; spacing-packaging in place of product, hidden beneath the outer box; outer square or rectangular boxing for apparently no other reason than to hide the pitifully small round product within; lush product ingredient descriptions on the packet for rank-tasting and meagre product constituents in actuality.

The new paradigm

The game is up for the big supermarket chains because the likes of Aldi and Lidl have shown us customers what can be done. Their own-brand stuff leaves us feeling delighted, not deprived. The Aldi and Lidl own-brand stuff reaches a quality level that we didn’t even know possible for the price-point offered and, on top of that, the quantity given for the price often seems around double that of similar products offered by the big supermarket chains.

All the main supermarkets are posting poor trading figures including Sainsbury. Its recent full-year results show underlying sales down 0.9%, like-for-like sales down 1.9%, underlying pre-tax profit down 14.7% and underlying earnings-per-share down 19.5%. That’s grim, but City analysts don’t predict a quick fix, suggesting that next year’s earnings will be down a further 18% followed by a flat performance the year after that. Sainsbury’s chief executive reckons the UK marketplace is changing faster than at any time in the past 30 years, which impacted Sainsbury’s profits, like-for-like sales and market share.

One bright spot in the results is that Sainsbury opened 98 convenience stores during the year and delivered over 16% convenience sales growth. The firm plans to continue to open one to two convenience stores per week. The convenience store format is an area in which it seems Sainsbury can remain competitive. However, future carnage in the big-store arena, because of the new give-more-for-less paradigm, remains unquantifiable, and that makes the firm a very uncertain turnaround proposition.

Then there is ARM Holdings

Last year, ARM Holdings’ revenues from licensing soared 30% year-on-year, and ARM’s customers shipped around $12 billion of chips containing ARM processors, which drove royalty growth. The company enjoys an embedded position in the rapid-digitalisation movement — one of the strongest trends of our generation.

ARM-designed technology enables devices across most of the range of original equipment manufacturers (OEMs), thanks to comprehensive partnering arrangements. ARM designs the chips and the manufacturers build and install, which drives revenues, cash flow and profits from the firm’s licensing and royalty arrangements.

ARM Holdings’ profit-growth record is impressive and City analysts forecast a 74% uplift in earnings-per-share this year followed by a further 20% the year after. Beyond that, multiple growth opportunities seem set to keep the business growing, one of which is expansion in the so-called Internet Of Things.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold owns shares in ARM Holdings. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Modern suburban family houses with car on driveway
Investing Articles

Should I snap up Taylor Wimpey shares at £1.30?

With the Taylor Wimpey share price down by almost 30% this year, should I snap up some shares while it's…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m finding shares to buy now – and keep for a decade

Our writer has been looking for shares to buy using an approach that looks both at long-term profit prospects and…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

What’s happening to the Petrofac (PFC) share price?

The Petrofac (LON:PFC) share price has had a seriously erratic year so far. I take a look at the latest…

Read more »

Young black woman in a wheelchair working online from home
Investing Articles

The Aviva share price is flying! Should I buy this 7% yield?

Despite recent gains, Roland Head thinks the Aviva share price could still be too cheap.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Here’s 1 passive income opportunity not to be missed!

This Fool details a passive income opportunity that could bolster his holdings, and the shares trading at cheap levels too.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Legal & General share price is dirt-cheap with a juicy dividend yield!

Jabran Khan takes a closer look at the Legal & General share price which looks like an opportunity to boost…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

If I’d invested £1,000 in this top lithium stock 5 years ago, here’s how much I’d have now!

This lithium stock has gone from strength to strength over the past year. But has it flown too high, or…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A growth stock with a price-to-earnings ratio of just 9.7! Should I buy Yalla?

I'm generally not too keen on investing in dollar-demonated stocks at the moment. But Yalla, with its low price-to-earnings ratio,…

Read more »