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Arm Holdings: The Momentum Play of the Year


Arm Holdings will live and die by its ability to continue crushing earnings estimates in the face of a very skeptical Wall Street.

My Mom and Pop taught me a lot of things, but diversification wasn't one of them.

As of Thursday's close, over 30% of my equity portfolio was dedicated to mobile-device plays -- Apple (AAPL), Motorola (MOT), and today's topic of conversation, Arm Holdings (ARMH).

Arm Holdings is a semiconductor IP licensing company, earning royalties on chips produced using Arm's architectures.

Arm's specialty is combining high-performance with low-energy consumption -- an essential for today's advanced mobile devices. Arm designs have found their way into almost every mobile phone on the market as well as into tablet computers like the Apple iPad and Samsung Galaxy. For that reason, Arm is essentially considered to be a mobile play.

As more devices using Arm technologies get shipped, Arm makes more money -- not all that different from other IP-licensing plays like Dolby Laboratories (DLB) and Tessera Technologies (TSRA).

Now I didn't get into Arm early. I bought my first slug on Thursday after months of watching it tick up in the face of a pretty crummy market for tech stocks. Year-to-date, Arm is up 120% versus minus 11% for the SOX, and minus 1.4% for the Nasdaq.

Here are the four reasons I finally took the plunge:

1. The Smartphone Boom

PCs are in the toilet, but smartphones are still rocking (see Why Merger Mania Is Bearish for PC Stocks). IDC recently raised its 2010 smartphone unit-growth forecast to 55% from 44%, and many hot smartphone models, including the iPhone 4, HTC EVO 4G, and Motorola Droid X, are back-ordered.

Nothing creates revenue visibility like a shortage.

2. Tablet Mania Running Wild

The iPad is hot -- it took Apple over four months to make them readily available for order over the Web. But we're also seeing Android-based tablets like the aforementioned Samsung Galaxy begin to hit the market, expanding the market opportunity for Arm-based processors.

3. Earnings Momentum Matches the Price Momentum

Momentum stocks are all about earnings beats and rising estimates. Arm fits the bill as it has beaten analysts' consensus estimates by an average of 58% over the past four quarters.

And circling back to my first point, the booming mobile-device market gives me faith that Arm can continue its earnings momentum near-term.

4. They Still Hate It!

Yes, Arm is up huge this year, but that hasn't stopped Wall Street from hating it because of a supposedly rich valuation. According to Reuters, just one analyst rates Arm a Buy, with two calling it a Hold, and three yelling Sell.

Now I'm sure you've seen all the nasty Research In Motion (RIMM) headlines lately:

"Analyst Calls RIM's Blackberry Yesterday's Phone"

"BlackBerry's Share Supposed to Collapse by 2012"

"RIM Falls as Survey Shows BlackBerry Corporate Loyalty Fading"

Well, based on analysts' ratings, Wall Street is actually more bullish on Research in Motion than it is on Arm!

Arm is one of the Wall Street analyst community's most-hated tech stocks -- and that means the bandwagon is far from full.

Adding It Up

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.
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Positions in AAPL, MOT, and ARMH.
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