Options/Futures

Return to Article

Dykstra: Deep-in-the-Money Call on Sigma Designs

Lenny Dykstra

With several stocks ending up as losers following the troubling economic news and renewed fears about the credit crisis, the Commerce Department disappointed economists when it reported that durable goods orders fell 1.7% in February. Economists had been calling for a 0.7% gain for durable goods orders, which are a gauge for business spending.

Adding to the bad news was another report showing that the sale of new homes in February fell to a 13-year low. The annualized rate of 590,000 was slightly better than the 570,000 economists had expected. To put that in perspective, this February's rate is about 30% below last February's figures.

The shoddy economic data has increased the chance of a bigger cut of the Fed funds target rate at the next Federal Reserve meeting at the end of April. The rate, which is currently at 2.25%, will most certainly fall by 25 basis points and could be shaved by 50 basis points.

Now, let's get to the Deep-in-the-Money call. Today, I'm going with Sigma Designs(SIGM Quote - Cramer on SIGM - Stock Picks). The company should be a good way to grab a win. Especially since the stock seems to have found a bottom. The other built-in protection is the fact that there are only 26.7 million shares in the float. With nearly 11 million shares short, there is nothing left to sell. The company trades at a forward P/E of 8.35, to go along with a staggering 0.34 price/earnings to growth (PEG) Ratio.

A stock's PEG is figured by the price/earnings ratio divided by its year-over-year earnings growth rate. In general, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth

Sigma sells silicon-based digital media processors. The processors are used in video technology for media players and high-definition TVs. Most importantly, Sigma should be off to the races later in the year, benefiting from the growing popularity of Blu-ray technology. Blu-ray technology is widely used in DVD recorders and provides a superior picture quality when compared to traditional DVDs.

Earlier this month Wall Street punished Sigma's stock after it disclosed a problem with its orders. Essentially, the amount of product it sent out exceeded market demand. Sigma says one of its customers over-ordered. Either way, someone dropped the ball in this case and the error caused uninspiring sales projections for the first quarter.

However, CEO Thinh Tran said sales are expected to recover in the second quarter, and this mistake shouldn't cost them in the long run.

Part of my game plan is to find good companies that have been unfairly punished by investors. Sigma is one of them. The stock is trading near its 52-week low of $20.04 and closed at $22.84 on Monday. Its highest point in the last year was $73 a share. I believe that it will be back up to $30 bucks a share before you can blink.

Sigma is in the right space at the right time. Blu-Ray is about to take off, and the company's balance sheet is pretty impressive.

Today, I will use the October $12.50 strike price, by placing a limit order at $11.50 to buy 10 Deep-in-the-Money calls going all the way out until October (MQNJZ), to give myself plenty of time for the stock to move my way.

Game of Life

Last week, I was fortunate enough to experience the great honor when The New Yorker magazine ran a profile about me that was headlined: "Nails Never Fails." I pick up the magazine this week and what do I see on the cover of their money issue? Here's some of the headlines. " Bear Stearns Died for Your Sins and "How to Lose $20 Billion." You can read those stories and cringe. Or you can stick with me on my new subscription service that provides my Deep-in-the-Money calls and make some money. If you would like to be on the list to receive a free trial for the service, send an email to dykstra@thestreet.com.

Before I came back Tuesday, it had been six months since you last saw me on The Street.com. I took a hiatus just after the Red Sox swept the World Series and now they're coming back from their exhibition games in Japan and getting ready for opening day. It's a fresh start for all of us. Last year doesn't mean a thing when Manny Ramirez goes to the plate now. And it doesn't mean a thing in investing. We're looking at the chips on the table right now.

But let me tell you what I was doing in the six months since the World Series. I started up The Players Club. The Players Club is dedicated to educating athletes about the world of finance. You may be wondering why athletes might need financial help when you hear about them signing eight-figure contracts. But the fact is many don't know how to invest, and it's not their fault. Kids turn into men without ever experiencing the world of finance. Sadly, what has been all too common; the money is gone just when their playing days are done and they really need it. Many a championship ring has ended up in a pawnshop. So I started The Players Club to give athletes a chance to discipline themselves financially early in their career so they finish with guaranteed recurring cash flow after they retire.

Now that The Players Club is off the ground, I'm happy to be swinging the bat again at The Street again.

Always Remember: Life is a journey enjoy the ride.

Know What You Own: Sigma Designs operates in the technology industry, and some of the other stocks in its field include Broadcom (BRCM Quote - Cramer on BRCM - Stock Picks), STMicroelectronics (STM Quote - Cramer on STM - Stock Picks) and Zoran (ZRAN Quote - Cramer on ZRAN - Stock Picks). These stocks were recently trading at ($19.17, -.63%), ($10.51, -.94%) and ($14.00, -.99%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.