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Why ARM Holdings plc Is More Attractive Than J Sainsbury plc

If we swim with the current rather than against it, we are likely to cover more distance during the time we spend swimming.

That analogy describes the advantage that ARM Holdings (LSE: ARM) enjoys over J Sainsbury (LSE: SBRY) — the strong flow of the booming tech sector carries ARM Holdings along, while J Sainsbury struggles against an outflow in the supermarket sector.

Stacked investor advantages

It’s hard enough to get investing right without adding the disadvantage of investing in a weak and declining sector, such as the supermarket sector now.

One of my investing influences is the controversial Jesse Livermore, who was an active trader during the first decades of the twentieth century. He is controversial as a guru because he made, then lost, his fortune on the stock market several times before ultimately losing, going bust again, and then committing suicide. It’s easy to dismiss him on that record but, actually, he left a lot to teach us.

Jesse Livermore recommended going with the strongest company in the strongest sector, and I think that’s good advice. It’s no accident that I chose ARM Holdings and J Sainsbury to compare. Both firms are the strongest and best firms in their sectors as represented in the FTSE 100, in my opinion. However, one sector is growing and one is declining. Jesse Livermore urged us to stack as many advantages in our favour as possible before investing and, on that point, ARM Holdings wins.

Why the flow has turned against the supermarket sector

The rout in the UK supermarket sector continues at pace in the face of competitive pressures from deep-discounting competition such as Lidl, Aldi and others. It’s more than just that, though. Supermarket customers seem sick of being treated as gullible fools by the big players in the supermarket sector. At least that’s how it feels to me. Now those big supermarket chains face a rebellion from their own previously loyal customers.

One of the main areas of discontent, and now one of the main battlegrounds, is the own-label arena. For decades, the big players have seemingly been committing vast amounts of resource to the art of deception. You know the kind of thing: packaging that tapers from the top down, to apparently give the impression that we are buying more of a food stuff than we actually are; spacing-packaging in place of product, hidden beneath the outer box; outer square or rectangular boxing for apparently no other reason than to hide the pitifully small round product within; lush product ingredient descriptions on the packet for rank-tasting and meagre product constituents in actuality.

The new paradigm

The game is up for the big supermarket chains because the likes of Aldi and Lidl have shown us customers what can be done. Their own-brand stuff leaves us feeling delighted, not deprived. The Aldi and Lidl own-brand stuff reaches a quality level that we didn’t even know possible for the price-point offered and, on top of that, the quantity given for the price often seems around double that of similar products offered by the big supermarket chains.

All the main supermarkets are posting poor trading figures including Sainsbury. Its recent full-year results show underlying sales down 0.9%, like-for-like sales down 1.9%, underlying pre-tax profit down 14.7% and underlying earnings-per-share down 19.5%. That’s grim, but City analysts don’t predict a quick fix, suggesting that next year’s earnings will be down a further 18% followed by a flat performance the year after that. Sainsbury’s chief executive reckons the UK marketplace is changing faster than at any time in the past 30 years, which impacted Sainsbury’s profits, like-for-like sales and market share.

One bright spot in the results is that Sainsbury opened 98 convenience stores during the year and delivered over 16% convenience sales growth. The firm plans to continue to open one to two convenience stores per week. The convenience store format is an area in which it seems Sainsbury can remain competitive. However, future carnage in the big-store arena, because of the new give-more-for-less paradigm, remains unquantifiable, and that makes the firm a very uncertain turnaround proposition.

Then there is ARM Holdings

Last year, ARM Holdings’ revenues from licensing soared 30% year-on-year, and ARM’s customers shipped around $12 billion of chips containing ARM processors, which drove royalty growth. The company enjoys an embedded position in the rapid-digitalisation movement — one of the strongest trends of our generation.

ARM-designed technology enables devices across most of the range of original equipment manufacturers (OEMs), thanks to comprehensive partnering arrangements. ARM designs the chips and the manufacturers build and install, which drives revenues, cash flow and profits from the firm’s licensing and royalty arrangements.

ARM Holdings’ profit-growth record is impressive and City analysts forecast a 74% uplift in earnings-per-share this year followed by a further 20% the year after. Beyond that, multiple growth opportunities seem set to keep the business growing, one of which is expansion in the so-called Internet Of Things.

To me, there is no doubt that ARM Holdings is more attractive than J Sainsbury as an investment proposition. Our top analysts here at the Motley Fool are always looking for great firms capable of making enduring long-term investments and identified five super-shares listed in the FTSE 100 that you may wish to research alongside ARM Holdings. You can find out the identity of these five companies, and why we like them, free of charge, by clicking here.

Kevin Godbold owns shares in 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.