The Long ARM Of The Law Of Portfolio Gains

There is a rumor out there this morning that ARM Holdings ARMH is up for sale. The stock is reacting positively this morning, up 5%, and ARM bulls might like the move, but it is not feasible. Morgan Stanley is out with a note this morning saying it does not believe ARM will get sold. ARM, based in Cambridge, England, does not actually make anything. Actually, ARM designs microprocessors, physical IP, and related technology and software. The CEO, Warren East, said there is not much value to any potential suitor, since they probably already use the technology now anyway. "If you get a buyer who is a significant part of the ecosystem, in which they already play a part, it is likely that they would be excluding part of the market and therefore diminishing part of the value of Arm," East said in comments obtained by The Telegraph. "Arm has been built around the principle of being agnostic at every point in the value chain. Because of that approach, it means that acquisitions are very difficult. It's not impossible, but Arm is a very valuable business as it is and a significant part of that value lies in its agnostic approach," East went on to say. Intel INTC has been mentioned before as a buyer, as has Apple AAPL. An Intel purchase would raise a ton of regulatory issues according to East, and there is no point to Apple buying the company, since it already has the intellectual property from ARM. "If you look at the end customer, like an Apple, or any company within the ecosystem at any particular point in the value chain, if one of those companies were to acquire Arm - well, why? "They either want access to the technology, which they have already, or they want to prevent competitors from gaining access to it. In reality it doesn't work very well...If you want to prevent your competitors getting the technology, it's not a very good way of doing it. There are 800 licences out there. Most are perpetual licenses. They last forever. The worst that company could do is seriously inconvenience their competitors," East exclaimed. ARM is a key component and one of, if not the major reason why Apple is slowly taking over the world. Its chip designs, which are used by Qualcomm QCOM, NVIDIA NVDA and other semiconductor companies have allowed ARM to generate £234 million of revenues in the first half of 2011. The more iPads, iPhones, and other smartphones gets sold, ARM wins. It does not matter who wins the battle, because ARM benefits either way. Therefore, it has no interest in being purchased, it would be detrimental to the company's business. At 38 times 2012 earnings, ARM is not cheap, but you are paying for a company that is the lynchpin to the mobile computing boom. It is growing like a weed, and has gained almost 60% over the past 52 weeks, compared to the 5.3% gain in the S&P 500. While this rumor has no legs, and will quickly get shot down, adding ARM to your portfolio could allow you to "reach" for extended gains. ACTION ITEMS:

Bullish:
Traders who believe that ARM will continue to power smartphones and tablets might want to consider the following trades:

• The more Qualcomm, NVIDIA, and other ARM-based chips get sold, the better it is for ARM Holdings. Use dips in ARM to add or to initiate positions in ARM.

Bearish:

This is ultimately bearish for Intel. Intel is way behind ARM-based chips in the mobile game, and that is where computing is going. Traders could put on a pair trade, going long ARM and short Intel.

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