How to Double Your Money in Three Years with This Stellar Tech Stock

On Monday, I showed you how to turn the recent sell-off in Apple Inc. (Nasdaq: AAPL) to your advantage.

But that's not the only way to exploit Wall Street's latest overreaction.

Today I want to tell about a company that has been a key part of the Apple's and the iPhone's smashing success - and, thanks to that, it's a tech stock currently out of favor on the Street.

But this play is more than just an Apple supplier. In fact, it's one of the best "pick-and-shovel" plays out there, because this firm's designs can be found in products made by some 300 companies.

Moreover, this British firm makes its money by licensing its technology to other companies.

I like to think of this as a "license to print money."

Let's figure out how to scoop up some of that cash ourselves...

Apple's "Merchant"

As a longtime tech investor, I'm always on the lookout for great pick-and-shovel plays. These companies don't develop smartphones or video games or any other tech consumer product you'd be familiar with.

Their technology is invisible.

They develop the systems, semiconductors, and other "ingredients" that consumer tech companies need to operate more efficiently.

As boring as that sounds, remember this: About 300,000 "Miner Forty-Niners" came to California hoping to strike it rich during the Gold Rush of 1848-1855. But it was the merchants who discovered the real "mother lode" - by selling the picks and shovels the miners needed to pursue their dreams.

In other words, with pick-and-shovel plays, we get all of "gold's" upside - gold here being smartphones and other hot tech products - without the risk of backing the wrong "miner."

And that's where microprocessor design firm ARM Holdings Plc. (Nasdaq ADR: ARMH) comes in.

tech stockPick-and-Shovel Pioneer

Founded in 1990, ARM revolutionized the semiconductor industry by pioneering "fabless" manufacturing - and it ranks as one of the world's very best chip design firms.

Fabless chip companies design - but do not manufacture, or "fabricate" - the semiconductors that make all of our digital devices possible.

By focusing on design, ARM avoids the huge overhead inherent in building and maintaining chip factories.

To put that in perspective, consider that Intel Corp. (Nasdaq: INTC) recently announced that it will spend a whopping $6 billion to upgrade one of its plants in Israel. In China, Intel is investing $1.6 billion to upgrade a plant in Chengdu - and that follows spending $2.5 billion on a plant in Dalian five years ago.

ARM avoids that process altogether. The British firm - probably the best known of the "Silicon Fen" companies based in and around Cambridge - makes its money by licensing its technology to other companies.

Like I said before, this is essentially a "license to print money."

ARM's Reach

Royalties and licensing account for more than 90% of sales, with the rest coming from services, software, and tools.

You can find ARM's designs in all iPhones and iPads. In that regard, the company has helped Apple become the most profitable mobile device maker in the world - by far.

But ARM doesn't stop there. Its designs also are in the flagship Galaxy smartphones from Apple archrival Samsung Electronics Co. Ltd. (OTCMKTS: SSNLF).

That's a lot of phones, but it still just scratches the surface. To date, ARM has signed more than 1,100 licenses with over 300 companies that have shipped more than 60 billion ARM-designed chips.

But don't take my word for it.

Let's have a look at how the company measures up...

We're going to be using my "five-part wealth-building strategy."

Rule No. 1: Great Companies Have Great Operations

First off, we look for companies with high operating margins and great leaders.

Consider that ARM has operating margins of 41%, roughly 36% higher than Apple's and more than three times those of Samsung. It's sitting on $1 billion in cash and virtually no debt.

CEO Simon Segars got the top job in 2013. He joined the company in 1991 - only ARM's 16th hire. Segars led the development of early products that went into some of the world's earliest mobile phones, and he holds patents for several bedrock semiconductor designs, making him a true visionary leader.

Rule No. 2: Separate the Signal from the Noise

To create real wealth, you have to ignore not just hype from the company, but also the noise you often hear coming out of Wall Street.

ARM's stock is down 13.7% over the past few months due to last week's Apple-related sell-off - and because its 22% increase in first-quarter sales missed forecasts by a scant 2.6%.

Ignore the noise - Wall Street's overreaction to ARM's financial report - and check out the signal.

Earnings jumped 39% to $120 million, meaning the company continues to improve its profit margins and cash flow. Plus, ARM raised its dividend by 25% to $0.20 a share and bought back 4 million shares during the quarter.

As far as I'm concerned, that means the stock is "on sale."

Rule No. 3: Ride the Unstoppable Trends

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Two major trends are acting as catalysts for ARM - and that's good news for us.

The first is the mobile revolution, in which consumers are buying some 1.2 billion smartphones a year, 95% of which earn royalties for ARM.

ARM also is a major player in wearable tech - a very fast-moving market. Forecasters at IDTechEx project sales of wearable electronics will hit $20 billion next year and will be valued at almost $70 billion a decade later.

ARM supplies processors used in devices from industry leader Fitbit Inc. (NYSE: FIT), which just went public June 19. ARM also supplies components for wearables from Sony Corp. (NYSE ADR: SNE), Samsung, and Pebble Technology Corp.

Rule No. 4: Focus on Growth

Companies with the strongest growth rates almost always offer the highest stock returns - and ARM is a growth machine.

During the second quarter, the chip industry shipped 3.4 billion ARM-based processors, an annual increase of some 26%.

That means the sales growth rate for ARM-based processors is 10 times that of U.S. economic growth. And over the past three years, the company has grown sales an average of 19% a year.

Rule No. 5: Target Stocks That Can Double Your Money

This is where we look at ARM's earnings growth and see how long it will take to double profits. By doing that, we can figure out how long it should take for the stock to double.

I've gone through the firm's financials in detail and am projecting earnings per share will grow over the next five years by an average 22%. I did that to give it a conservative discount from its three-year average of 27%.

Now we use my "Doubling Calculator." Divide the compound growth rate of 22 into the number 72. We find that it should take roughly 3.2 years for ARM's stock to give us 100% gains.

ARMH opened today at $45.97, giving it a $21.85 billion market cap.

This is a great growth stock - remember, we're talking about triple-digit gains in less than three and a half years - and it's temporarily out of favor on Wall Street.

So take advantage of this early "back to school" sale and pick up the company whose designs are in 95% of the world's smartphones.

You can trust in this one for a long time to come.

RAWR! If you listened to Wall Street - rarely a good idea - you'd think that software firms are little more than aging dinosaurs in the tech sector. But one Silicon Valley legend is quietly transforming itself into a cloud-based provider of essential software tools. (I bet you use at least one of them.) Today, we're going to show you how this company is doing that...

About the Author

Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...

  • He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
  • He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
  • As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.

This all means the entire world is constantly seeking Michael's insight.

In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.

Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.

And even with decades of experience, Michael believes there has never been a moment in time quite like this.

Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.

To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.

His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.

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