Last year I told Fools that ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) was a company exiting a decade-long run of higher-than-normal growth. Since then, the company has increased in value by around 11%, which might make some tempted to jump in on the back of what appear to be nice returns.
But not so fast. For while the price of ARM has extended in the last three-month period, so has the stock’s beta (the calculation of its overall price volatility). Beta measures the risk of holding a stock during the period in which returns are being calculated: the higher the beta, the lower the risk-adjusted return.
In the case of ARM, the stock plunged almost 13% in value to a 52-week low over the period before it resurfaced, creating a higher beta value. Thus accounting for ARM’s beta therefore produces a risk-adjusted return of barely 3% or so over the previous three-month period. That no longer looks like such impressive growth. So what does right now?
A New Idea For A New Year
As growth investors, what we want are stocks where growth is consistently being managed – not the stuff that is tarnished by wild interim high-low swings. This is especially important if you like to shuffle money between different holdings as various investment opportunities appear on the horizon.
Of course, technology is a great place to find this sort of growth, as its effect is to streamline costs while producing exponential income. Combine these two forces and you have something resembling constant value creation in a portfolio.
For a company harnessing these kinds of attributes via an interesting strategy revolving around acquisitions, look no further than Ideagen (LSE: IDEA).
Since mid-December, Ideagen has risen in value by a fifth, compounding a year-long 17% climb. (Contrast this to ARM’s recent rally, which merely shortened a 52-week 9% decline overall.)
Ideagen’s intrinsic market capitalisation jumped to £63.5m in December when the company raised £17m for an acquisition it picked up after a new stock issuance that was oversubscribed by a whopping £40m, including 11 new institutional shareholders. The company still trades well below this valuation, making it appear like great value.
Why all the fervour in the City for Ideagen’s shares? Because the company uses tech in tandem with strong management to both increase the earnings and decrease the costs of the acquisition target, creating constantly exponential P/E growth. That in turn means a share price that keeps rising with an impressive risk-adjusted return attached.
Ideagen’s strategy is to make an acquisition, then centralise costs of the target to cut back 10% of overhead while creating cross-selling synergies to drive revenue growth an additional 10%.
Is It A Bird, Is It A Plane …. No, It’s A Superstock
Ideagen’s acquisition at the end of 2014 of software developer Gael is a classic example of how the company creates value. For a start, Ideagen picked the maker of risk and compliance software – which supplies the life sciences, aviation, healthcare and manufacturing industries – up for a song, at 7.8 times EBITDA.
The acquisition, when spread out across the company’s existing sales channels, is immediately earnings-enhancing. Gael will add £9 million in revenues and EBITDA of £2.3 million to Ideagen’s 2014 earnings, and those earnings are expected to grow at an exciting 24% clip throughout 2015.
In addition, Ideagen picked up 1,000 new customers in the tricky compliance and standards management sector, including various NHS units and complex manufacturing clients.
That’s a value-creation story you’d be crazy not to take part in.
How To Find More Good Ideas
Solid growth picks such as Ideagen might seem like they are far and few between in a market where values are see-sawing and then spiking upwards in what appear to be random patters, but it’s actually easier to detect indications of winning stocks than you’d think, as long as you know the tricks.
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Daniel Mark Harrison has no position in any shares mentioned. 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.