Contrarian Shopping List

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." -- Warren Buffett

Of all the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When looking to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to snap up stocks on the cheap.

In the short term, professional traders' pessimism can become a self-fulfilling prophecy. Desperate institutions lower their asking prices to get rid of a stock, prompting buyers' bid prices to fall in tandem, creating the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy," snapping up bargains from these fearful sellers. (Assuming they really are bargains.) In today's column, we'll see which stocks Wall Street's motivated sellers are most frantic to unload. Once we've compiled this shopping list of potential contrarian picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders include:

Do you love a broad, deep, seemingly neverending market sell-off? Of course you do. Lots of junk gets tossed out the window in these market hissy-fits, but if you root around in the resulting pile deep enough, long enough, you could find a gem or two.

As expected, investors agree that most of the stocks Wall Street is tossing this week are indeed junk. But they see at least one diamond in the rough -- and it's a Motley Fool Rule Breakers recommendation to boot. That stock is Sigma Designs, a maker of media-processor chipsets for IP video technology, connected media players, and high-definition TV sets. The business certainly sounds sexy enough, but let's see if there's anything more to investors' optimism as we examine ...

The bull case for Sigma Designs
People say honesty is the best policy (but riddle me this -- they also say, "Nice guys finish last"). Today, we're going to look at two painfully honest investors explain why they like Sigma Designs.

First up, CAPS All-Star FleaBagger, who told us a story a couple of weeks ago about how he discovered Sigma Designs: "One of my co-workers is always talking about investing in Sony (NYSE: SNE) because of Blu-Ray, and that it's going to be such a huge cash cow going forward. I challenged him to find a smaller company that makes a necessary component of Blu-Ray players or discs, and this is what he came back with."

For what it's worth, other CAPS players mention that Broadcom (Nasdaq: BRCM) is another Blu-ray chip maker.

Fellow All-Star lowellfield pointed out a few days ago: "Competition and channel-stuffing issues killing stock, but still #1 in media processors for IPTV, which I think is real. Price action suggests people just have no idea what the co is worth."

My thoughts exactly. Fools, I won't pretend to understand the technological underpinnings of this company, but like the two Fools quoted above, I love this stock. Selling for a mere 8.3 times trailing earnings, but expected by analysts to grow at nearly 30% per year over the next half decade, I can't explain today's price on Sigma Designs. It's a great bargain.

I am a little leery that free cash flow didn't match up to net income over the first three quarters of 2007. But fourth-quarter results aren't all the way in yet. Management did not include a cash flow statement in its earnings release, and has not yet filed its 10-K.

Could be, Sigma Designs pulled a rabbit out of a hat by year's end. But even if it didn't, the company's run-rate on free cash flow suggests an annual level of about $27 million. If the truth is anywhere near that number, the stock still looks cheap to me.

Time to chime in
Of course, the aim of this column isn't to tell you what I think about Sigma Designs -- or even what other CAPS players say. We really want to hear your thoughts. And if you understand the technology as well as you understand the numbers, you'll be just that much more welcome. Click on over to Motley Fool CAPS and tell us what you think.

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