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

Updated from 8:54 p.m. EDT

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 DesignsSIGM. 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.