Is It Time To Sell ARM Holdings plc, Spirent Communications Plc And Inmarsat Plc?

Are these 3 stocks overvalued? ARM Holdings plc (LON: ARM), Spirent Communications Plc (LON: SPT) and Inmarsat Plc (LON: ISAT).

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One of the star performers of 2015 has been global mobile satellite communications services provider Inmarsat (LSE: ISAT). Its shares have risen by 35% while many of its index peers have struggled to post positive capital returns.

A major reason for this has been strong performance in the last few months, with the market reacting positively to Inmarsat’s third quarter update which showed that the company is making encouraging progress. Key to this is an improved outlook for its aviation division, which recently signed a memorandum of understanding with Lufthansa to provide inflight connectivity services to around 150 aircraft. Furthermore, Inmarsat also signed a strategic partnership with Deutsche Telekom to develop the group component of Inmarsat’s European Aviation Network.

Although Inmarsat’s long term future appears to be relatively bright, the company’s current valuation seems to price in its near-term prospects. For example, Inmarsat trades on a price to earnings (P/E) ratio of 32.7 and yet is expected to grow its bottom line by just 5% in 2016. This means that, while it could prove to be a long term winner, its shares could come under a degree of pressure in 2016 due to what appears to be an overzealous valuation.

Meanwhile, shares in Spirent (LSE: SPT) have performed poorly this year, with the telecoms testing company recording a fall of 12% since the turn of the year. The main reason for this was a profit warning in August and, while sales for the full-year are expected to be in-line with previous guidance, Spirent’s profitability is due to be below forecasts as a result of plans to invest in new products.

While this is disappointing, Spirent’s business has historically been volatile and, in fact, it has had more than one profit warning in recent years. Looking ahead, it is forecast to post a fall in its bottom line of 24% for the full year and while this would be disappointing, this is set to be offset somewhat by growth of 30% in 2016. With Spirent trading on a price to earnings growth (PEG) ratio of just 0.6, it could be a sound long term buy for less risk-averse investors.

Similarly, ARM (LSE: ARM) also has considerable appeal at the present time. Its bottom line potential remains significant even though it is becoming an increasingly mature company. For example, its earnings are due to rise by 67% in the current year, followed by further growth of 14% next year. This puts the company’s shares on a PEG ratio of just 0.6, which indicates that the 4% gain in their value since the start of the year could improve significantly in 2016.

Although there are fears that sales of smartphones will come under pressure as interest rates rise in the US and the Chinese growth rate slows, ARM’s sales numbers remain very upbeat. And, with its shares offering such a wide margin of safety, its risk/reward ratio seems to be highly attractive at the present time.

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 assessed. Consider taking independent financial advice.

Peter Stephens owns shares of 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.

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