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Some thoughts about Sigma Designs



May 30, 2008 – Comments (2) | RELATED TICKERS: SIGM , BRCM.DL

Sigma Designs (SIGM) reported $0.40 in earnings (excluding items) instead of $0.42 in earnings, as analysts expected. Also, analysts expressed skepticism about Sigma's growth prospects, citing Broadcom (BRCM) ominously. So, SIGM traded down 18%, to less than 12 times cash flow. This for a company whose revenue and earnings growth has been nothing short of torrid.

Yes, I think this is an overreaction. But it does give us an important lesson in moats. An economic moat, as I'm sure most of my readers already know, is a sustainable advantage over competitors and/or potential competitors, and it can include enormous prior capital expenditures that a competitor would have to replicate, or a patented technology or drug, or even government favoritism. The thing is, a lot of small, fast-growing companies don't have a moat, and SIGM doesn't either, as far as I know. This means that if their profit margin or return on equity is high, it won't be high for long before competition starts to bring it back down. This means that SIGM has to develop a sustainable competitive advantage, or moat, in order to be a truly great long-term investment. Maybe it has one I don't know about. Maybe I'll focus on companies with a moat, like the one I recommended in my free investing blog, The Fleabagger Portfolio. I probably will give SIGM another try at these prices, though.

Full disclosure: even though I sold my SIGM calls a few weeks ago and hold no position in any stock openly mentioned here, I probably will buy SIGM stock and/or calls in the coming days or weeks.

2 Comments – Post Your Own

#1) On May 30, 2008 at 2:32 PM, madcowmonkey (< 20) wrote:

It's still free. I can't believe it:)

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#2) On May 30, 2008 at 3:37 PM, FleaBagger (27.49) wrote:

A year and a half from now, when my first six recs are all trouncing the market and inflation by at least 10 percentage points and I still haven't gotten any money from the ads, you can bet it will no longer be free.

...If I can figure out how to charge for it, that is.

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