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A Farewell to ARM Holdings: Why It's Time for Investors to Get Out


Through earnings misses, guidance reductions, and downbeat commentary, all four are telling us the same thing: the chip business is starting to look pretty foul.

I've been among the biggest bulls in the market on ARM Holdings (ARMH) over the past year (see Arm Holdings: The Momentum Play of the Year), but as of the time you're reading this, I'll no longer own one of recent history's hottest momentum stocks.

This week, we've seen a wave of bad news from four major semiconductor-equipment manufacturers -- Applied Materials (AMAT), ASML Holdings (ASML), Microchip Technology (MCHP), and Novellus Systems (NVLS). These companies sell the gear that allows companies like Intel (INTC) and Samsung to churn out chips in response to consumer and business demand.

Through earnings misses, guidance reductions, and downbeat commentary, all four are telling us the same thing: the chip business is starting to look pretty foul. Factors include the shaky global macroeconomic picture, middling PC demand, and earthquake-related disruption in Japan.

The market's started to discount the weakness to some degree, as the Philly Semiconductor Index is 17% off its February high. However, semi stocks are still up over 100% off their 2008 lows, so it's pretty obvious that there's plenty of room to fall from here.

In plain English, the global gadget business isn't looking so hot, and the market's not fully appreciating that. I'm just trying to live to fight another day, so I'm dumping ARM.

Now, ARM Holdings has been kicking butt because of its leverage to the spectacularly booming smartphone industry, which grew 80% in the first quarter, according to IDC.

And for now, smartphone demand is looking decent, at least based upon data we've seen from Google (GOOG), HTC, and NTT Docomo. Obviously, there have been some weak players like LG and Nokia (NOK), but the overall smartphone picture looks decent.

However, ARM isn't a pure mobile-computing play. It still gets a third of its business from other sectors within consumer and enterprise technology.

So while the smartphone boom may continue, the company still has plenty of exposure to other areas of tech -- not a good situation considering the broader slowdown in semiconductor demand.

And this my friends, is the point at which a mega-high P/E ratio becomes a problem.

I summed ARM up last September with this statement:

Make no mistake about it, Arm Holdings is a no-guts, no-glory momentum play that will live and die by its ability to continue crushing earnings estimates in the face of a very skeptical Wall Street.

The day that stops happening is the day to get out -- but it looks like we're a ways away from that.

Well, I've hit the point where I'm starting to lose confidence in ARM's "ability to continue crushing earnings estimates," and that means it's time to get out.

If ARM gets hit by any company-specific bad news -- a lousy quarter, lowered guidance or, heaven forbid, a big smartphone design win for Intel -- you'll see this stock drop under $20 in the blink of an eye.

So I'm out.

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No positions in stocks mentioned.
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