10 top stocks to rival ARM Holdings

The recent takeover of ARM Holdings by Japanese telecom group SoftBank marked the end of British ownership for one of the country's most successful technology companies. For long-term shareholders of ARM, the deal crystallised some spectacular gains. Yet many now face the prospect of finding new stocks that fit the same sort of investment profile.

Over the past eight years, shares in ARM grew in value by more than 1,400%. That spectacular growth was underpinned by an innovative model of developing intellectual property for chips that are used in a range of consumer electronics devices. Its customers include some of the biggest names in technology, like Apple and Samsung.

What made ARM an appealing investment?

On reflection, one of the key factors that made ARM attractive was its quality. Over the past five years, its earnings grew at a compound annual rate of around 30% - and they were accelerating. Its operating margins were just over 40% last year and its return on capital employed close to 21%.

These were both sector-leading and market-leading performance figures that made ARM the sort of investment that Warren Buffett might suggest was worth holding forever.

ARM's high quality and strong momentum meant its shares rarely looked cheap to buyAnother important factor in recent years was ARM's positive momentum. A major re-rating came between 2012 and 2013 when the price doubled to more than 1,000p - a level where it traded for the following three years.

But its consistent "earnings momentum" attracted regular forecast upgrades from brokers, which were eye-catching for prospective investors… including SoftBank. It was even paying a modest dividend that was growing consistently.

Unsurprisingly, ARM's high quality and strong momentum meant that its shares rarely looked cheap to buy. It was among a number of large-cap high flyers on the market that almost always look expensive, but can be worth paying up for.

Looking for another ARM

There are few obvious replacements among technology stocks in the UK market that match ARM's investment profile. But cast the net wider, and it's certainly possible to find high quality, positive momentum large-caps, although often on rich ratings.

This week we screened for high flyers like ARM by looking for companies with a strong blend of quality and momentum - even if they look expensive. At Stockopedia we do this using a range of measures against which companies are scored and ranked (to get a rank for quality, value and momentum) - with zero being poor and 100 being excellent. We also included a rule for a minimum of five years of dividend growth, although the yields are generally modest.

A stand-out tech name on this list is Micro Focus International, which recently agreed to take on the software assets of Hewlett Packard Enterprise in an $8.8 billion (£6.8 billion) merger. The deal promises to turn Micro Focus into one of the biggest tech companies in the UK. As it stands, its high quality and momentum certainly echoes what we saw with ARM.

Among the other tech stocks are Moneysupermarket and accounting software group Sage. Looking further afield, similar investment profiles can be found in cyclicals like JD Sports and Domino's Pizza to defensives like Abcam and Diageo.

A focus on quality and momentum

The recent takeover of ARM was a bittersweet moment for investors who felt they'd found a solid long-term investment.

For those looking to recycle their gains on the stock, it could be worth exploring companies that share many of the features that made ARM such a successful investment in recent years.

It's worth remembering the high quality stocks can fall from grace if momentum suddenly turns against them. But high quality large-caps have on average tended to be successful investments over the long term.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.