Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you why I believe ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is currently in the bargain basement.
A FTSE 100 growth company
ARM Holdings is Britain’s tech giant, valued at £12bn at a current share price of 857p. The company, which licenses and receives royalties on fast, power-efficient, low-cost microprocessor designs, has been at the heart of the smartphone revolution.
Earnings have increased at a compound annual growth rate of 23% over the last three years and analysts see an increase of the same order for 2015. The table below shows some data on share prices and trailing 12-month P/Es (based on diluted earnings per share) across the three-year period.
| Period | Share price range (p) | Share price average (p) | P/E range | P/E average |
| 22/7/14 – 9/10/14 | 841 – 986 | 913 | 39.2 – 46.0 | 42.6 |
| 23/4/14 – 21/7/14 | 834 – 960 | 890 | 39.9 – 46.0 | 42.6 |
| 4/2/14 – 22/4/14 | 875 – 1,047 | 971 | 42.5 – 50.8 | 47.1 |
| 22/10/13 – 3/2/14 | 924 – 1,110 | 1,001 | 47.7 – 57.3 | 51.7 |
| 24/7/13 – 21/10/13 | 846 – 1,039 | 931 | 47.1 – 57.8 | 51.8 |
| 23/4/13 – 23/7/13 | 759 – 1,097 | 931 | 45.6 – 65.9 | 55.9 |
| 5/2/13 – 22/4/13 | 866 – 971 | 917 | 58.9 – 66.1 | 62.4 |
| 23/10/12 – 4/2/13 | 640 – 893 | 771 | 45.7 – 63.8 | 55.1 |
| 25/7/12 – 22/10/12 | 527 – 599 | 573 | 38.5 – 43.8 | 41.9 |
| 24/4/12 – 24/7/12 | 469 – 537 | 500 | 35.9 – 41.1 | 38.2 |
| 31/1/12 – 23/4/12 | 536 – 611 | 582 | 43.1 – 49.1 | 46.7 |
| 25/10/11 – 30/1/12 | 548 – 645 | 589 | 47.0 – 55.4 | 50.6 |
As you can see, the P/E rating has been coming down since a peak of over 60 about 18 months ago. Lately, we’re back to a P/E level not see for two years.
Furthermore, ARM has no debt, and the cash on the balance sheet has increased 50% over the two years from £496m to £746m, making today’s P/E even more attractive.
At what price a bargain?
I reckon if you can pick ARM’s shares up on a P/E of under 40 (and just to remind you, I’m talking about a trailing 12-month P/E), you’re getting a pretty good bargain for a high-growth tech company.
With ARM’s current trailing 12-month earnings per share standing at 21.43p, a P/E of 40 equates to just about bang on the current share price of 857p. So, I have ARM in the bargain basement — at the top end — as things stand.
