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Why ARM Holdings plc Should Lag The FTSE 100 This Year

ARM HoldingsARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is a super growth stock, isn’t it? And aren’t they exactly the kind that should come powering out of the post-recession recovery like a rocket?

Well, that’s certainly not what’s happened in 2014 so far. In fact, since the start of January ARM shares are down 15% to 918p, while the FTSE 100 is up 1%. Clearly, we need to look at the bigger picture.

Massive growth

Looking back over five years, ARM shares are up a staggering 590%, and over ten years things are looking even better with a 970% rise! I bet you wish you’d bought some back then, don’t you?

The reason the shares are falling back a little is easy to fathom, I think, and it lies in the changing mood following the end of the recession. The thing is, last year was a pretty bullish one with the FTSE 100 gaining a very nice 14%, and investor sentiment was upbeat. And ARM shares actually soared by 43% in 2013!

Then for various reasons, optimism has melted away in 2014. Wages haven’t started to catch up yet, consumer spending is still cautious, house prices spiralling beyond many people’s reach again, the eurozone is taking longer to recover, and the world is really not booming again.

Caution has prevailed and last year’s mini-bull has backed off — and there will have been a fair bit of profit-taking too after 2013’s storming run for ARM.

What’s next?

Are ARM shares good value now that they’ve slipped back a bit?

A quick look at fundamentals shows us a forward P/E of 40.5 for the year ending December 2014, followed by 33 for 2015 — and that’s high relative to the FTSE long-term average of around 14.

But it’s the lowest that ARM shares have seen since 2009. And we’d only need 2015’s forecast earnings per share (EPS) to multiply around 2.3 times over the following years to get the P/E down to average. Is that reasonable? ARM’s EPS has already grown 3.8-fold in the last four years, and there’s no sign of that growth stopping.

There’s a modest 11% expected this year, but there’s 23% pencilled in for 2015.

Bargain?

At half-time this year, 2.7 billion ARM-based chips had already been shipped, up 11% on the same period the year before. More and more licences are being signed, and the market for mobile computing is surely still only in its infancy.

So yes, I think the share price pause might indeed be a time to buy — but you must do your own research and make your own decision.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended shares in 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.