Last year I told Fools thatARM Holdings(LSE: ARM) (NASDAQ: ARMH.US)was a company exiting a decade-long run of higher-than-normal growth. Since then, the company has increased in value by around 11%, which might make some tempted to jump in on the back of what appear to be nice returns.
But not so fast. For while the price of ARM has extended in the last three-month period, so has the stocks beta (the calculation of its overall price volatility). Beta measures the risk of holding a stock during the period in which returns are being calculated: the higher the beta, the lower the risk-adjusted return.
In the case of ARM, the stock plunged almost 13% in value to a 52-week low over the period before it resurfaced, creating a higher beta value. Thus accounting for ARMs beta therefore produces a risk-adjusted return of barely 3% or so over the previous three-month period. That no longer looks like such impressive growth. So what does right now?
ANew Idea For A New Year
As growth investors, what we want are stocks where growth is consistently being managed not the stuff that is tarnished by wild interim high-low swings. This is especially important if you like to shuffle money between different holdings as various investment opportunities appear on the horizon.
Of course, technology is a great place to findthis sort of growth, as its effect is to streamline costs while producing exponential income.Combine these two forces and you have something resembling constant value creation in a portfolio.
For a company harnessing these kindsof attributes via an interesting strategy revolving aroundacquisitions, look no further thanIdeagen(LSE: IDEA).
Since mid-December, Ideagenhas risen in value by a fifth, compounding a year-long 17% climb. (Contrast this to ARMs recent rally, which merely shortened a 52-week 9% decline overall.)
Ideagens intrinsic market capitalisation jumped to 63.5m in December when the company raised 17m for an acquisition it picked up after a new stock issuance that was oversubscribed by a whopping 40m, including 11 new institutional shareholders. The company still trades well below this valuation, making it appear like great value.
Why all the fervour in the City for Ideagens shares? Because the company uses tech in tandem with strong management to both increase the earnings and decrease the costs of the acquisition target, creating constantly exponential P/E growth. That in turn means a share price that keeps rising with an impressive risk-adjusted return attached.
Ideagens strategy is to make an acquisition, then centralise costs of the target to cut back 10% of overhead while creating cross-selling synergies to drive revenue growth an additional 10%.
Is It A Bird, Is It A Plane . No, Its A Superstock
Ideagens acquisition at the end of 2014 of software developer Gael is a classic example of how the company creates value. For a start, Ideagen picked the maker of risk and compliance software which supplies the life sciences, aviation, healthcare and manufacturing industries up for a song, at 7.8 times EBITDA.
The acquisition, when spread out across the companys existing sales channels, is immediately earnings-enhancing.Gael will add 9 million in revenues and EBITDA of 2.3 million to Ideagens 2014 earnings, and those earnings are expected to grow at an exciting 24% clip throughout 2015.
In addition, Ideagen picked up 1,000 new customers in the tricky compliance and standards management sector, including various NHS units and complex manufacturing clients.
Thats a value-creation story youd be crazy not to take part in.
How To Find More Good Ideas
Solid growth picks such as Ideagen might seem like they are far and few between in a market where values are see-sawing and then spiking upwards in what appear to be random patters, but it’s actually easier to detect indications of winning stocks than you’d think, as long as you know the tricks.
Whatever the performance of your portfolio last year, start the first working week of 2015 by downloading this free special report by the Motley Fool on 10 steps to making a million in the market. It won’t cost you anything, there is absolutely no catch, and hey – reading it couldwell spark a profitable investing idea or two to get 2015 off to a rip-roaring start!
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Daniel Mark Harrison 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.
