Why I'm Adding eBay and Dropping Sigma

A month has passed, and once again the Nasdaq Index is heading north. Should the markets weather yesterday's interest rate announcement by the Federal Reserve Board without too violent a correction, there's a good chance of the rally continuing through to the end of the year.

This rally has been based, up till now, not only on expectations of a further interest rate cut, but also on macro figures far better than those predicted by the pessimists, and a surprisingly strong shopping season. On the macroeconomic front, work productivity grew 6.3% in the third quarter, against an expectation of 4.9%. 94,000 jobs were added to the US labor market in November, and the price of oil fell below $90 a barrel.

For those who have doubts about the US consumer's robustness in the wake of the sub-prime crisis and the collapse of house prices in certain regions of the US, last Thursday's publication by the Federal Reserve of its latest statistical report shows why no one should be in a rush to write the Americans off. The report also shows why experts such as Abby Joseph Cohen believe no recession is likely in the US next year. The report sums up the movement of financial assets in the US during the third quarter.

Citigroup chief US equity strategist Tobias Levkovich, someone else who also believes a recession is unlikely, recently wrote that 80% of the net increase in the wealth of US families in the last five years came from sources outside the real estate sector. Last Thursday's report confirms this, and it would appear, from the third quarter figures, that the total net wealth of US families from financial sources increased 9.5% over the previous year to a new record of $31.1 trillion, more than all the other countries together.China is a very rich country, but its citizens are quite poor, and in the US it is exactly the opposite. Those people in too much of a rush to bury the US tend to forget this.

I am now adding eBay Inc. (EBAY) to my portfolio, tracked by "Globes", and the real reason for adding it, aside from the usual financial assessments, is my first purchase on it in recent days. This was a transaction in which people from China, the US and Israel were involved. It was the famous guru Peter Lynch, former mutual fund manager at Fidelity, who came up with the apparently simple philosophy that there is nothing to beat personal experience when buying consumer stocks.

As I see it, eBay is, first and foremost, the best real estate stock I know, and it is also a recommended financial stock as well. It is a real estate stock because it owns the world's largest shopping mall, a virtual mall on infinite space with a presence in almost every country, and, just like a physical mall, it collects its share of both the turnover and store rentals, meaning a fee charged for displaying products for sale. It is a financial stock because its payment platform PayPal is a thriving business in its own right.

Citigroup rates eBay "Buy" with a target price of $49, 44% higher than its current price. After closely monitoring the volume of sales on the site during the current shopping season, Citigroup last week raised its fourth quarter sales forecast for eBay to $2.17 billion, and its earnings per share forecast to $0.42 per share, both of which are slightly higher than the upper range of the company's own guidance.

Citigroup says that the sharp fall in eBay's share price from its annual high of more than $40 just before it unveiled its third quarter results, was caused by investors fearful of an erosion in profit margins in 2008, but feels these fears are exaggerated. It expects the company to continue its large share buy backs. It has purchased 35 million shares since the beginning of the year at around $34 each.

Among the factors that Citigroup feels will drive forward eBay's business results next year are the collaboration with Yahoo! (YHOO) Japan, announced last week, the global economic trend, as reflected by the larger-than expected switch to online purchasing in the third quarter, and further growth in the pool of customers for whom PayPal does payment clearance.

While adding eBay to my portfolio, I am divesting the second part of one of my most successful investments this year - Sigma Designs Inc. (SIGM), which has yielded a 170% return since July. The company's splendid results of two weeks ago sent its stock soaring to a high in excess of $70, giving it a market cap of $1.85 billion, with annual sales expected to reach $220 million by the end of January, and earnings per share of $2.10. Part of the stock's meteoric climb was triggered by the large short position just before the results were released, and it is highly likely that a large part of this position, six million shares, was closed after the results were published.

I find it difficult to envisage Sigma maintaining the rate of sales and earnings growth of the last few quarters next year. If there is a slowdown in growth, the stock will undergo a severe correction, and I will get another opportunity to re-enter it. The gorillas are unlikely to allow Sigma to remain almost on its own in the burgeoning IPTV market for much longer, and on the other hand, there is still no strong growth in its other line of business, DVD players using the new Blu-ray disc format.

Last Thursday, Sigma announced that it would be calling a shareholder's meeting to approve an increase in the quantity of registered shares to 100 million. This would appear to imply that a stock split will be announced, but it could also be a preliminary move ahead of an acquisition of a company for shares, a move that is quite logical considering the valuable currency it currently has - a share priced at $70. If there is a field that I feel would be a logical one for Sigma to move into in order to diversify its product range, it is WiFi chips, and here I would advise it to take a look at Metalink Ltd. (MTLK) as an interesting acquisition target.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.