3 Overvalued Stocks

THE VALUE INVESTOR: These stocks are trading above their fair market value - could it be time to trim your profit?

Emma Wall 18 December, 2014 | 11:00AM

UK equity markets have moved sideways this year – but these three stocks have made gains. Is it time to trim profit from these three overvalued companies? They remain attractive for the long-term investor thanks to their economic moats – or competitive advantage over their peers – and income prospects, but this may be an opportunity to use gains to invest in other less-pricey stocks.

ARM Holdings (ARM)

ARM holds an extensive library of microprocessor intellectual property and has particular expertise in low-power high-performance chip architectures. ARM's IP is the backbone of most processors used in mobile devices today, and strong tailwinds from both the shift to higher-end smartphones and the proliferation of connected devices as part of the “Internet of Things” should bode well for ARM in the years ahead. ARM essentially develops the blueprints that allow a variety of leading chipmakers, such as Qualcomm, to design many of their semiconductors.

Just as Intel's chips dominate the PC market, ARM-based chips are found in almost all handsets, where low power and longer battery lives are critical factors. In exchange for its IP, ARM collects both an up-front license fee and ongoing royalties based on the price of each ARM-based chip sold. The source of ARM's wide economic moat, in our opinion, is intangible assets stemming from the firm's IP, as well as the strong ecosystem of partners around the ARM platform.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
National Grid PLC904.20 GBX1.85
Smith & Nephew PLC1,575.50 GBX-0.10

About Author

Emma Wall  is former Senior International Editor for Morningstar

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