The Motley Fool

Should You Avoid ARM Holdings plc And Buy Sepura Plc And Nanoco Group PLC?

2015 has been a rather disappointing year for investors in ARM (LSE: ARM) (NASDAQ: ARMH.US), with the intellectual property specialist seeing its share price rise by just 3%. Certainly, that is a better performance than the FTSE 100, which has seen its value decline by 1% in the same time period. However, when you consider how strong ARM’s financial performance is expected to be this year, it is somewhat surprising.

Growth Stock

In fact, doubts surrounding ARM’s status as a growth company are set to be kicked into touch this year, with the company forecast to grow its earnings by 29%. And, looking ahead to next year, further growth of 20% is being pencilled in and this means that ARM’s earnings could be as much as 55% higher in 2016 than they were in 2014. That’s a stunning rate of growth and shows that, while ARM is becoming a more mature company and appears to offer greater stability than was the case a handful of years ago, it remains a top quality growth stock. Furthermore, it should see investor sentiment improve due to a fast-growing bottom being likely to act as a positive catalyst moving forward.

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Other Options

Of course, there are other options within the UK technology sector. For instance, Sepura (LSE: SEPU) has seen its shares rise by an impressive 12% since the turn of the year, with the radio design specialist set to post strong growth numbers following an impressive performance in recent years. In fact, Sepura has managed to grow its earnings at an annualised rate of 31% during the last four years, which compares favourably to ARM’s annualised growth rate of 18% during the same time period.

And, looking ahead, Sepura is expected to post earnings growth of 8% this year and 18% next year which, while lower than ARM’s growth rate, could still push the company’s share price higher. That’s because, while ARM trades on a price to earnings growth (PEG) ratio of 1.4, Sepura has a PEG ratio of just 0.8, which indicates that its shares could continue to outperform those of ARM over the medium to long term.

Turnaround Potential

Meanwhile, sector peer, Nanoco (LSE: NANO), could begin to reverse the challenging year that it has endured in 2015. That’s because the display and lighting specialist is forecast to move from loss into profit next year following a number of years of a red bottom line. And, while it trades on a forward price to earnings (P/E) ratio of 51, investor sentiment could improve significantly and help to reverse the 42% share price fall that has occurred during the course of the current year. Clearly, though, Nanoco offers less value and higher risk than either ARM or Sepura, owing to its lack of profitability and the fact that investor sentiment has been weak in recent months.

Looking Ahead

ARM appears to have a very bright future and seems to be well-worth buying at the present time. It has an excellent track record of growth, offers good value for money and is likely to outperform the wider index over the medium to long term. However, with its superior past performance and more appealing valuation, Sepura could continue to beat ARM in 2015 and beyond, thereby making it a more appealing buy at the present time.

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Peter Stephens 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.