Why I Think ARM Holdings plc Is A Buy

ARM (LSE: ARM) (NASDAQ: ARMH.US) is a company whose prospects I’m hugely optimistic about and, with the FTSE 100 having had a decent run of late and sentiment being strong, I’m thinking of taking some risk and adding it to my portfolio.

Indeed, taking more risk and buying ARM go hand-in-hand, since it is a technology stock with a relatively high beta of 1.5. This means that if stock markets go up, shares in ARM should (in theory) go up by 50% more than the index. Similarly, if the index falls, ARM shares should (in theory) fall by 50% more than the index.

So, a high-beta stock such as ARM is good to own in bull markets, but less so in bear markets. Since I’m bullish and want to take more risk, a high-beta stock such as ARM could be ideal for my portfolio.

However, a high beta is not the only reason why I’m thinking of adding ARM to my portfolio.

I’m also highly impressed with the returns it delivers to shareholders. For example, return on assets last year was a whopping 13.3%, meaning that ARM generated 13.3p of net profit for every £1 of total assets carried on its balance sheet.

This figure is hugely encouraging and has improved steadily over the last 5 years, growing from 5.9% in 2008 to its current figure. Indeed, due to the asset-light structure of the company, a higher return on asset figure seems to be very achievable in future.

In addition, ARM continues to be a hugely exciting growth stock. For instance, earnings per share (EPS) are forecast to grow by 39% this year and 23% next year. This is a very high rate of growth and shows that ARM continues to be one of the leading lights of UK technology.

So, I’m optimistic on ARM’s prospects and am thinking of adding shares in the company to my portfolio. I’m hugely impressed by the return on assets generated by the company, as well as the stunning growth prospects that are forecast over the next couple of years by the market. Of course, the fact that ARM is a high beta cyclical is also attractive at a time when I’m looking to take more risk when sentiment is strong among investors.

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> Peter does not own shares in ARM.