There's not much to get excited about in the chip space these
days, especially when you look at a chart of the Philadelphia
Semiconductor Index. It's been lagging the market since February
2011, mostly because several large components have exposure to
the PC market which has fallen on hard times due to sluggish
sales.
Some chip stocks remain well positioned for growth including
ARM Holdings (Nasdaq:
ARMH
). It's a U.K.-based chip designer with a strong presence in the
smartphone and tablet market. It licenses its technology to scads
of large-cap tech names, including Apple (Nasdaq:
AAPL
).
ARM has a market capitalization of $14.5 billion and it's
liquid with an average daily volume of 2.3 million shares. Last
week, CEO D. Warren A. East started off the company's
third-quarter earnings conference call, saying "royalty revenues
are at record levels, volume shipments are at record levels and
licensing and backlog are at record levels."
Investors cheered its earnings report after the company said
earnings rose 29 percent from a year ago to $0.18 a share. Sales
growth accelerated sequentially, rising 24 percent to $233.5
million. Full-year profit is seen rising 21 percent this year
(compared to 2011) and 24 percent in 2013.
ARM continues to gain share in non-mobile markets like digital
TVs and set-top boxes, as well as micro-controllers and smart
cards. The company signed 29 licenses in the quarter for a very
broad range of end applications, from embedded micro-controllers
to image processors and digital cameras and mobile phones. About
one-third of the licenses were brand new with many coming from
Asia.
Even though major averages remain in a distribution phase,
recent price and volume trends in ARM point toward a stock under
accumulation. It's exactly the type of technical setup to target
in the early stages of a new market uptrend. A look at its weekly
chart shows the stock is in the early stages of breaking out from
a long base.
Support for ARM is strong in the $28 area. The only way the
stock will get down to that level again is if major averages
suffer another leg down. ARM should be able to hold above this
level for now. When it comes to its gap up on Oct. 23, it may or
may not fill the gap. A common misconception is that stocks
ALWAYS fill gaps, but there's plenty of market precedent that
shows this is not always the case, especially when it comes to
really strong stocks.
That said, major averages remain in technical downtrends until
proven otherwise. It's tough for most stocks to make headway when
the market tide is flowing negative. New buys are risky at the
moment.
If, however, major averages can follow through with conviction
in coming days, a stock under accumulation like ARM with strong
fundamentals and technicals has a solid chance of
outperforming.
Stock chart:
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