We recently compiled a list of the 7 Best UK Growth Stocks To Invest In. In this article, we are going to take a look at where Arm (NASDAQ:ARM) stands against the other UK growth stocks.
The Economy of the United Kingdom
According to a report by KPMG, the United Kingdom’s GDP growth will slow in the second half of 2024 but will pick up slightly to 1.2% in 2025. This growth is expected to be driven by a less restrictive monetary policy and continued improvements to real wages, which could support stronger consumption and business investment. However, the longer-term GDP growth could be limited to around 1.1% a year due to a historically weak pace of productivity growth.
UK inflation is expected to rise to 3% in early 2025 after falling below 2% in September. This increase is attributed to the ongoing economic recovery and the impact of interest rate cuts on the economy. However, the Bank of England is expected to approach easing monetary policy cautiously, with the base rate expected to reach 3.5% by the end of 2025, to stimulate the economy while avoiding overheating and inflationary pressures.
The UK’s consumer spending is expected to be dampened by higher savings rates. UK consumers have been putting a significantly higher proportion of their income aside since the pandemic, which may continue to reduce spending growth. While some of the increase in savings could unwind as interest rates fall, a significant part of the increase in savings could prove more persistent, owing to longer-term demographic trends and increased caution in response to a more volatile economic environment. In terms of investment, the forecast expects overall investment growth to accelerate as further interest rate cuts reduce the drag on business investment, and the new Government’s focus on accelerating economic growth could also help spur a positive momentum. The UK labour market is expected to continue to loosen despite robust activity in the UK economy over recent quarters. The forecast notes that firms could see easier hiring and weaker wage growth ahead as the labour market continues to adjust to changing economic conditions.
The United Kingdom’s Market Outlook
Neil Shah, Director of Research at Edison Group, a leading investment research company in the United Kingdom, said that the market is concerned about the economy’s growth slowing down, but interest rates are decreasing at the same time. As a result, investors are taking a barbell approach by balancing their portfolios with a mix of growth stocks and defensive positioning.
Shah highlights the UK’s relative attractiveness from a valuation perspective, particularly compared to its European peers. He notes that there have been reports of investors investing elsewhere but believes that the UK market is starting to come into focus, with positive signs such as the consumer holding up better than expected.
Shah also discusses the ongoing outflows from UK pension funds, which have reduced their allocations to the UK from 50% to 3%. He believes that this selling pressure is starting to bottom out and that there are signs that it may start to turn around. Additionally, Shah highlights the capital markets reform agenda, which he believes has a lot of ambition, but needs to be implemented.
Shah said that there are many undervalued stocks in the UK and that investors are starting to take notice. He mentions that there has been a rotation out of Europe and into the UK, driven by economic concerns in some European countries and geopolitical issues. This trend will continue, and the UK market will eventually become more attractive to investors.
The economy of the United Kingdom is expected to experience a moderate growth rate driven by a less restrictive monetary policy and improvements to real wages. The forecast by KPMG suggests that the UK economy will continue to grow at a moderate pace and will be stable in the coming years. With that in context, let’s take a look at the 7 best UK growth stocks to invest in.
Our Methodology
To compile our list of the 7 best UK growth stocks to invest in, we used the Finviz and Yahoo stock screeners to find the 20 largest companies in the UK in growth-related industries. We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A robotic arm holding a semiconductor chip, emphasizing the precision and quality of the company’s production equipment.
Arm (NASDAQ:ARM)
Number of Hedge Fund Investors: 38
Arm (NASDAQ:ARM) is a semiconductor company based in the UK that has been revolutionizing the industry with its innovative intellectual property for processors. Arm’s (NASDAQ:ARM) business model is supported by strong license and royalty revenue growth, driven by the increasing adoption of its chip architecture, which offers significant cost and energy efficiency advantages. The company’s partnerships with leading technology giants such as Amazon, Google, Microsoft, and Nvidia further solidify its position in the market.
The company’s royalty revenues have been consistently increasing, driven by the increasing adoption of its Armv9 architecture, which offers 35% greater performance efficiency compared to its predecessor, Armv8. Additionally, Arm’s chip shipments have averaged 4% growth for the past three years, with revenue per shipment increasing moderately by 7%. The company’s license revenue has also seen significant growth, with an average increase of 30% over the past four years, driven by the rising number of licensees, which has grown by 25% annually.
Arm (NASDAQ:ARM) has dominant position in mobile applications, with a 99% market share, and its growing presence in high-growth end markets such as cloud and network equipment, position it for continued success. In the second quarter, the company’s stock was held by 38 hedge funds with stakes worth $979.08 million. D E Shaw is the largest shareholder in the company with a stake worth $340.67 million as of June 30.
Overall ARM ranks 1st on our list of the best UK growth stock to invest in. While we acknowledge the potential of ARM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ARM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.