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Update SIGM, TSL 2/6

June 2nd, 2008 · No Comments

Our other two plays are having a little bit of a difficult time, one more than the other.

SIGM. Sigma Design is our one disappointment so far. We hope you did set the stop-loss just above 20 (where we advised to buy), as we suggested. We don’t see it going anywhere for quite some time. This is not really as much the result of disappointing earnings (these didn’t disappoint by a whole lot, only 5% or so), as it has everything to do with the uncertainty surrounding the company.

The basic reasons seem to be that it’s most important markets are growing slower than expected. In the IPTV market, there was a pile-up of inventories at Motorola, supposedly because slower acceptation rates at it’s customers (like AT&T). Apparently, the supply-chain is badly managed, otherwise this kind of inventory build-up would not have been taken place.

Something similar happened in the blue-ray market. Apparently, market participants were not prepared for the sudden end to the format war that was hampering acceptation of high-definition video. Now that this format war has ended, companies in the winning camp were actually unprepared to take advantage in a swift way by ramping up production and generating economies of scale, and they are hampered by a shortage of crucial supplies, so once again, bad supply-chain management is also partly to blame.

So the uncertainty surrounding Sigma is big, so big that not even its management seems to have a clue, and it is this, more than anything, that is hurting the stock price right now. We are still confident that both markets will start to grow, so this might all be temporary.

Then there is the competitive threat. Both markets are Sigma’s to lose. As we have argued before, it’s rational for companies not to become too dependent upon a single supplier, so to a considerable degree, this is to be expected. Yet the basic fact stands that Sigma remains very well positioned in two markets which (although not entirely in a predictable way as we learned these days) are set to grow a lot larger over the coming years.

An awful lot of the uncertainty is already priced in. Yet we do not see immediate catalyst that will propel this thing higher, so it’s goodbye for now as far as we’re concerned.

TSL. Trina is bumping against it’s critical support. It has held so far, but the manic-depressive solar sector seems to be in the grips of it’s depressive phase once more, despite the good fundamental news. Now, apparently, executives at First Solar, the industry’s bell-weather, have sold part of their holdings.

We actually believe that First Solar (FSLR) could very well become a victim, perhaps even the main casualty of polysilicon prices collapsing. This could very well destroy it’s main competitive advantage, price per watt. Perhaps these beliefs are actually shared in the top of the company, who knows.

Another worry is that the sector suddenly seems to correlate with the price of oil, which is due for a correction as well. However, on the sunny side, Thursday will bring earnings (after the bell), and we are quite optimistic about those.

Tags: SIGM · TSL