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Should You Dump ARM Holdings plc In Favour Of Imagination Technologies Group plc?

ARM Holdings

It’s been an incredibly disappointing year for investors in ARM (LSE: ARM) (NASDAQ: ARMH.US), with the UK’s most prominent technology company seeing its share price fall by 24% since the turn of the year. Although the company’s performance remains strong and its business model is still highly impressive, other technology companies, such as Imagination Tech (LSE: IMG), are beginning to command much stronger sentiment from the market. Indeed, Imagination Tech is up 5% during the course of the year. Does this mean it’s time to sell ARM and buy Imagination Tech?

Differing Growth Profiles

When it comes to growth, both ARM and Imagination Tech have huge potential. For instance, ARM is forecast to grow earnings by 22% next year, which is roughly four times the expected growth rate of the FTSE 100 and shows that the company remains a true growth play. However, Imagination Tech is set to go one better and grow its bottom line by 38% next year. This could be a key reason why sentiment has been stronger for Imagination Tech during 2014.

However, investors should be mindful of the growth prospects on offer at Imagination Tech. That’s because earnings have been extremely volatile in recent years, with profits declining in two of the last five years. Compare this to ARM and it’s clear why ARM remains the darling of UK technology, since it has increased earnings per share in four of the last five years, with the only blot on its copybook being 2009 when profits fell by only 4%. Therefore, it’s clear that while ARM may not be set to grow profits as quickly as Imagination Tech, its growth profile is far more reliable and consistent.

Looking Ahead

Clearly, ARM’s share price fall has made the company much better value. However, it still trades on a relatively high price to earnings (P/E) ratio of 36.1, while Imagination Tech’s P/E is a far more attractive (but still very high) 28.6. Therefore, both stocks are priced for growth, with their price to earnings growth (PEG) ratios of 1.6 (ARM) and 0.8 (Imagination Tech) indicating that the latter is better value than the former.

However, the decision between the two potentially comes down to risk and, more specifically, how much risk you are willing to take. That’s because ARM may be the more expensive, slower growing of the two but is more likely to deliver above average growth in the long run due to its more reliable earnings profile. Imagination Tech, though, clearly has potential but could come with more lumps and bumps than its larger rival. As a result, both companies appear attractive and could complement each other well in a Foolish portfolio.

Despite this, neither company has been named the top growth share of 2014 by the team at The Motley Fool.

That accolade goes to a company that may have gone under your investment radar until now, or it could be a stock that you haven't looked at in a while. Either way, we think it has huge potential and that it could make a positive impact on your portfolio.

You can find out more, for free and without any further obligation, by clicking here. Doing so could bolster your investment returns in 2014 and beyond.

Peter Stephens has no position in any shares mentioned. The Motley Fool owns shares of Imagination Technologies and has recommended shares in ARM Holdings.