Looking Chipper in the Chip Space

There's not much to get excited about in the chip space these days, especially when you look at a chart of the Philadelphia Semiconductor Index. It's been lagging the market since February 2011, mostly because several large components have exposure to the PC market which has fallen on hard times due to sluggish sales. Some chip stocks, however, remain well positioned for growth including ARM Holdings ARMH. It's a U.K.-based chip designer with a strong presence in the smartphone and tablet market. It licenses its technology to scads of large-cap tech names, including Apple AAPL. ARM has a market capitalization of $14.5 billion and it's liquid with an average daily volume of 2.3 million shares. Last week, CEO D. Warren A. East started off the company's third-quarter earnings conference call, saying “royalty revenues are at record levels, volume shipments are at record levels and licensing and backlog are at record levels.” Investors cheered its earnings report after the company said earnings rose 29% from a year ago to $0.18 a share. Sales growth accelerated sequentially, rising 24% to $233.5 million. Full-year profit is seen rising 21% this year (compared to 2011) and 24% in 2013. ARM continues to gain share in non-mobile markets like digital TVs and set-top boxes, as well as micro-controllers and smart cards. The company signed 29 licenses in the quarter for a very broad range of end applications, from embedded micro-controllers to image processors and digital cameras and mobile phones. About one-third of the licenses were brand new with many coming from Asia. Even though major averages remain in a distribution phase, recent price and volume trends in ARM point toward a stock under accumulation. It's exactly the type of technical setup to target in the early stages of a new market uptrend. A look at its weekly chart shows the stock is in the early stages of breaking out from a long base. Support for ARM is strong in the $28 area. The only way the stock will get down to that level again is if major averages suffer another leg down. ARM should be able to hold above this level for now. When it comes to its gap up on Oct. 23, it may or may not fill the gap. A common misperception is that stocks ALWAYS fill gaps, but there's plenty of market precedent that shows this is not always the case, especially when it comes to really strong stocks. That said, major averages remain in technical downtrends until proven otherwise. It's tough for most stocks to make headway when the market tide is flowing negative. New buys are risky at the moment. If, however, major averages can follow through with conviction in coming days, a stock under accumulation like ARM with strong fundamentals and technicals has a solid chance of outperforming.