Miah says that a number of companies in the sector have reported solid results that have led to unexpected rises in the share price, with leading semiconductor designer Arm Holdings typical.
The company reported a 20 per cent rise in its total revenues in the third quarter, while Monitise – a mobile banking services provider – saw revenues doubled in the year to the end of September.
Miah recommends investors buy Monitise and hold ARM, urging them not to be put off by fears of another dotcom bust.
Miah said: “AIM-listed mobile banking and payment services provider Monitise is still considered an early-stage venture and has yet to make a profit. However, its revenues are heading in the right direction and the company works with some high calibre partners, including HSBC, Co-op Bank, Bank of China and Visa. In its latest year-end report, the company had £19.6m in cash and no debt.”
“Although there is potential growth opportunities for Monitise, small companies in this sector face many challenges. Competition and changes in technology and compatibility shifts are significant risks to a business that has no obvious barriers to entry. We continue to recommend Monitise as a ‘buy’ for investors looking for an interesting, but high-risk growth proposition.”
Performance of stocks year-to-date
Source: FE Analytics
Data from FE Analytics shows that Monitise has risen 28.33 per cent in the year-to-date, while ARM Holdings is up 8.89 per cent.
Miah says that the latter company faces stiff competition and the lack of predictability of future earnings leads him to rate it a hold.
He said: “ARM Holdings has established licensing agreements with many technology companies and mobile phone developers that use its chips to power their own products. The company produces for about 95 per cent of all mobile phones and 25 per cent of all electrical devices.”
“ARM is well-positioned to benefit from new opportunities that arise as mobile phones and technology evolves. However, investors should be aware of the possible slowdown in earnings growth and uncertainty over ARM’s market share, as rivals such as Intel attempt to muscle in.”
“While the shares are highly rated, we believe they offer opportunities to short to medium-term traders who can take advantage of volatility within an established trading pattern.”
“The company has indicated that seasonal sales this Christmas are unlikely to be as strong as last year, despite the release of the iPhone 5 and iPad Mini. We continue to recommend investors ‘hold’ ARM Holdings based on its market leading position, good cash flow and sound financial structure.”
Our data shows that 12 funds hold ARM Holdings in their top-10, including the Unicorn Free Spirit fund, which is four per cent invested in the company and is a top quartile perfomer in the IMA UK All Companies sector over three, five and 10 year periods.
Marlborough UK Leading Companies is another All Companies fund which has a large holding in the company and has produced top quartile returns over the same time periods.
Monitise is held in the top-10 of only four UK funds, including Paul Mumford’s five crown rated Cavendish Opportunties, the fifth best performing fund out of 169 in the IMA UK All Companies sector over 10 years.