Stocks Under $10 Weekly Summary

After the late-week rally leading up to the holiday weekend, stocks sold off on Tuesday as traders returned to their desks. Most stocks struggled to crawl higher for the week despite a strong bounce Thursday. Even so, there were some bright spots.

Pipeline operator Kinder Morgan (KMI) announced plans Monday to go private through a leveraged buyout, sending its shares sharply higher. Also, power company NRG (NRG) disclosed that Mirant (MIR) had made a takeover bid, and NRG shares spiked on the news.

But on Friday, a soft employment report capped off the short-lived rally, ending an otherwise uninspired week of trading. The number of new nonfarm jobs in May was less than half what economists were expecting, and investors' worries about the economy resurfaced.

For the week, the Dow lost 0.3%, the Nasdaq gained 0.4%, and the S&P 500 was up 0.6%.

We made a few trades this week, taking advantage of the market's volatility to capture some trading gains.

-- On Tuesday, we added 300 shares to our ENGlobal (ENG) stake, building the position to 700 shares. The stock had fallen precipitously over the past two weeks despite what we believe is a solid environment for capital spending for oil refinery upgrades. Then a rally in ENGlobal on Wednesday and Thursday boosted the stock more than 20%, allowing us to pare 200 shares from our position.

-- On Wednesday, we initiated a 600-share stake in Microtune (TUNE) . We believe the company is well-positioned to benefit from strong growth in digital cable subscribers in the U.S. In addition, Microtune should be a key player in the rollout of digital video broadcasts to cell phones and portable video players.

-- Last, we used strength in Two-rated Smith Micro (SMSI) to lighten our position to 200 shares from 300, for an 18% gain. The stock has been a solid performer, but we would prefer to be buyers at lower prices.

The model portfolio turned in another solid week, gaining just under 200 basis points this week despite continued volatility of the major indices. So we will continue to stick to our discipline of owning stocks of companies in secular growth markets, making our holdings less sensitive to economic cycles. However, we'll look to use some of our Two-rated names to rebuild our cash in the coming week, but as always will alert subscribers before taking any action.

Now let's take a look at the portfolio and some of the moves we made this week.

One quick note: Ones are stocks we would buy now, while Twos are stocks we would buy only on a pullback from current levels. And as a reminder:

-- A Game Breaker is going to change the landscape of an industry, as Intel, Microsoft and Wal-Mart did in their sectors. Investors can make big money in these stocks by getting in before the crowd.

-- Inflection Point stocks have a broken business model that's on the mend but has yet to be recognized by the market. Investors who recognize a turnaround early can pocket strong returns.

-- Stealth Stocks are often unknown names to the general public, but can be hugely profitable investments, especially when they score well in the Alpha component of our proprietary rating system.

-- The Alpha component has certain characteristics -- such as a small analyst following and float, among others -- that increase the potential for large percentage moves on news and events.

ONES

@Road (ARDI:Nasdaq, $5.75, 800 shares, 3.96% of the model portfolio, Game Breaker): The company provides mobile resource management (MRM) solutions to customers in the cable, telecom and industrial industries. MRM allows companies to track, monitor and communicate with service technicians and field service workers via wireless networks with global positioning system (GPS) capabilities. The company's products offer customers such as BellSouth (BLS) a compelling means of improving workforce efficiency and reducing operating expenses. At the recent quote, shares are changing hands at about 1.7 times 2007 analyst sales forecasts vs. a peer group average of 3. Compelling valuation and the potential for double-digit percentage sales and earnings growth for the foreseeable future creates a favorable risk/reward for investors.

Arris (ARRS:Nasdaq, $12.42, 250 shares, 2.67%, Inflection Point): Arris is a leading provider of equipment that enables the delivery of data and voice services such as Internet and voice-over-Internet protocol (VoIP). The company presented at two conferences in New York this week: Friedman Billings Ramsey's 10th annual Growth Investor conference Thursday and Cowen & Co.'s annual technology conference Friday. Arris remains upbeat about its prospects as a leading supplier of voice modems for VoIP services to Comcast (CMCSA) . We believe Comcast is making a concerted effort to build its VoIP business in 2006 as part of its triple-play voice, video and data offering. Also, Charter Communications (CHTR) , another large Arris customer, has issued upbeat capital spending plans for 2006, a great deal of which will be spent on VoIP modems for its growing telephony business. As such, we view Arris shares as attractive for growth- and momentum-oriented investors with a high tolerance for volatility.

Blockbuster (BBI:NYSE, $4.81, 700 shares, 2.90%, Inflection Point): Blockbuster is the largest video-rental chain in the U.S. In addition, the company operates an online rental business similar to that of Netflix. Based on data from Rentrak, a video rental industry data tracker, as compiled by research firm JP Morgan, we believe the second quarter is shaping up to be solid for domestic video rental trends. April industry sales grew 3.7% from year-ago levels to $574.4 million, while May industry sales through May 24 were up 5% from last year's levels. Given Blockbuster's proven track record of delivering results that are ahead of the industry average, we believe the strong second-quarter rental data will boost Blockbuster's earnings and cash flow this quarter. For instance, research firm Wedbush Morgan is assuming only 2.5% same-store sales growth in the second quarter, which could provide room for upside to Wedbush's break-even earnings forecast. As such, we remain bullish on shares and believe the stock will trade above $5 in 2006.

Chartered Semiconductor (CHRT:Nasdaq, $9.95, 400 shares, 3.43%, Inflection Point): The company manufactures semiconductor products for customers such as Broadcom (BRCM) and Advanced Micro Devices (AMD) . Chartered is a beneficiary of strong demand from Broadcom and Advanced Micro, as well as other semiconductor companies, largely because of growing demand for semiconductor products. Shares traded lower this week, due largely to lackluster investor interest in semiconductor stocks. Even so, Advanced Micro announced plans Monday to spend $2.5 billion to expand its two chip-building facilities in Germany, indicating AMD's confidence in future market share gains against rival Intel (INTC) . While AMD's increases in internal capacity can have a negative impact on business with Chartered, we believe the upgraded AMD plants won't be ready for at least 18 months. AMD's continued success vs. Intel will lead to strong orders for Chartered. Also, we believe sales of the Xbox 360 video game console from Microsoft (MSFT) will remain robust and strong orders for chips for Sony's Play Station 3, set for release later this year, will drive higher gross margins for Chartered. As such, shares are an attractive buy at current levels.

Distributed Energy Systems (DESC:Nasdaq, $5.42, 1,000 shares, 4.67%, Game Breaker): The company designs and installs small-scale power generators that offer an alternative to central-power ones. On Thursday, research firm Merriman Curhan upgraded shares to buy from neutral, citing strong sales backlog growth and improving economics for the company's distributed generation projects, owing to lower natural gas prices. We believe Distributed Energy is well positioned as a leading engineering and product procurement firm to benefit from increased alternative energy system installations by utilities. In addition, Distributed Energy has seen a surge in demand for on-site hydrogen generators since the 2005 hurricane season. On-site hydrogen generation takes delivery risk out of the equation for power and chemical companies that are dependant on the gas for operations. We believe shares are attractive for purchase up to $6.

Dynegy (DYN:NYSE, $5.34, 1,200 shares, 5.52%, Inflection Point): Dynegy is one of America's largest electricity generators. Power generating company NRG (NRG) announced Tuesday night that it had rejected a takeover offer from peer Mirant (MIR) . The deal would have valued NRG shares at 2.25 times the value of Mirant's share price, or approximately $54.50 a share. This assumed an enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) multiple for NRG of approximately 9.3 times the Street's 2007 EBITDA estimates. Applying this multiple to the Street's 2007 EBITDA estimate for Dynegy would yield a share price closer to $10 a share for Dynegy. Using a more conservative multiple of 8 gives a share price of $7, which is 35% above the current quote. We believe investors should take advantage of Dynegy's attractive comparative valuation to make purchases. The company has improved its balance sheet over the past year with debt refinancing and debt retirement, and we believe shares will trade above $6 this year.

EarthLink (ELNK:Nasdaq, $8.54, 300 shares, 2.21%, Inflection Point): EarthLink is a leading Internet service provider (ISP) and is focused on growing its municipal Wi-Fi and MVNO (mobile virtual network operator) segments. Earthlink announced last week that it was selected by the city of New Orleans to deploy a municipal Wi-Fi network. This announcement brings EarthLink's total number of Wi-Fi initiatives to five and serves as evidence that municipal Wi-Fi initiatives are gaining credibility and traction with large municipalities such as Philadelphia, and midsized municipalities such as Madison, Wis. EarthLink will offer both a free service and a paid service with varying data transfer rates. EarthLink has already announced plans to buy back up to $180 million of its own shares in the open market, and to spend its hefty cash flow on growth initiatives such as municipal Wi-Fi networks and its MVNO partnership with South Korea Telecom to create Helio. Given all this activity, we believe shares are a compelling value at just 6 times EBITDA vs. what we believe should be a multiple of 9.

ENGlobal (ENG:Amex, $9.39, 500 shares, 4.04%, Stealth Stock): ENGlobal is an engineering and construction (E&C) company providing services primarily to oil and gas refinery companies. We added 300 shares Tuesday after the company announced what we believe will prove to be a smart acquisition of privately held WRC. WRC is focused on land management, environmental compliance and government regulatory services in the Denver area. ENGlobal issued 175,000 shares of common stock and a promissory note of an undisclosed amount to finance the deal. WRC had trailing 12-month revenue of greater than $20 million, according to ENGlobal's press release. ENGlobal said it will use WRC's Denver facility to expand ENGlobal's higher-margin Rocky Mountain business. On Thursday, ENGlobal's shares had rallied some 23% from our Tuesday purchase price, and we reduced some of our exposure with a 200-share sale Thursday. We believe the company is executing well on its strategy to complete accretive acquisitions, and shares could trade above $10 in the coming year.

Evergreen Solar (ESLR:Nasdaq, $10.97, 400 shares, 3.78%, Game Breaker): The company is a leader in developing solar-power cells and wafers. We believe Evergreen Solar will announce capacity expansion plans for its German joint venture within the next three months, which should serve as a catalyst for shares. Specifically, the company's EverQ plant in Germany currently has 30 megawatts of manufacturing capacity, and we believe the company will announce plans to expand the plant to at least 60 megawatts in total annual production capacity in 2006. In addition, the company could soon provide an update on its Quad-Ribbon manufacturing process that will improve Evergreen's efficiency by requiring less polysilicon per megawatt of production. There is currently a polysilicon shortage, so companies with more efficient manufacturing processes have a competitive advantage. We maintain our rating this week and believe Evergreen is the most attractively valued solar play in the market.

Flanders (FLDR:Nasdaq, $10.73, 400 shares, 3.70%, Stealth Stock): Flanders is a leading supplier of commercial and industrial filters used in heating and air conditioning systems. We believe the filtration business will stand up well in a potential economic slowdown, which makes Flanders a solid defensive model portfolio holding. In addition, the company is working to increase its operating margins by selling its patented nested filters, which lowers shipping costs, and increasing its presence in Home Depot and Wal-Mart with higher-margin branded products. Improvements in margins could yield up to 80 cents in earnings in 2007, implying a forward P/E of 12.5 vs. an industry average of closer to 20. We believe shares could trade up to $15 this year and maintain our One rating this week.

Hollywood Media (HOLL:Nasdaq, $4.28, 1,400 shares, 5.16%, Stealth Stock): The company generates most of its revenue by selling online advertising, along with theater and movie tickets through its wholly owned Hollywood.com Web site and its minority stake in MovieTickets.com. We believe shares are undervalued relative to the combined value of the company's Internet properties. For instance, we believe the company's 26% ownership interest in MovieTickets.com is worth about $3 a share, or about 75% of the stock's recent quote. In addition, Hollywood Media owns and operates Hollywood.com and Broadway.com, which are growing revenue at a double-digit percentage rate. Break-even earnings and profitability are likely in the second half of this year for Hollywood, which should spur shares closer to the $8 level.

Hudson City Bancorp (HCBK:Nasdaq, $14.00, 400 shares, 4.82%, Stealth Stock): The company provides banking services to clients in Long Island, New Jersey and Staten Island. The company paid its 7.5-cent quarterly dividend to shareholders Thursday. Hudson City shares yield a respectable 2.18%, though this is below its peer average of 3.18%. Even so, Hudson City's 20%-plus bottom-line growth prospects for the next two years make up for the lack of dividend yield. In addition, Hudson City is returning capital to shareholders via a share buyback of up to 5% of its outstanding shares. We believe Hudson City's aggressive branch growth strategy, which calls for a total of 120 branches to be opened by year-end from just 105 today, will enable it to deliver above industry-average earnings growth as the interest rate environment improves. We maintain our One rating this week.

Lawson Software (LWSN:Nasdaq, $6.68, 700 shares, 4.03%, Inflection Point): Lawson is a leading provider of enterprise resource planning (ERP) software that integrates data from different departments within a company and makes it accessible for quick analysis. On Wednesday, the company was a featured presenter at research firm Cowen & Co.'s Technology conference in New York City. Having recently closed its acquisition of Swiss-based software firm Intentia, the presentation focused on the cross-selling opportunities and cost savings created by the deal. Specifically, the company said it believes it can save $15 million to $18 million in operating expenses from the combination, while increasing its total addressable market from $600 million on a standalone basis to $2.5 billion as a combined entity. Management maintained its full-year operating margin target of 15%, which would be a nice improvement from year-ago levels when operating margins were in the low teens and high single digits. In addition, the company is looking to increase its sales force with former sales people from PeopleSoft, which was acquired in 2005 by Oracle (ORCL) and led to a number of layoffs of trained sales people. We believe shares could trade to $10 in 2006, making the current quote a compelling entry point.

Microtune (TUNE:Nasdaq, $6.80, 600 shares, 3.51%, Game Breaker): Microtune makes tuners and radio frequency amplifiers that are used in cable boxes and digital televisions. In addition, the company is targeting the nascent mobile digital video market with its DVB-H standard based product. We initiated a 600-share position Wednesday and believe strong demand for digital cable services, digital television sets, and mobile video products will drive 20%-plus top- and bottom-line growth for the next 24 months. The company sells its products into all of Scientific Atlanta's cable boxes, all of Arris' cable modems, and has already signed on Korean electronics company LG as a cell-phone manufacturing partner for its mobile video chips. In addition, Microtune counts Samsung, the worlds leading manufacturer of liquid crystal displays (LCD), as a customer, which offers Microtune the opportunity to showcase its technology on a large scale in the coming quarters. We believe shares will be catalyst driven, with the company's scheduled presentation at Bear Stearns' June 12 technology conference in New York City providing the next date for potential positive new customer announcements from the company. As such, we view the current quote as compelling for investors.

Novatel Wireless (NVTL:Nasdaq, $10.67, 500 shares, 4.60%, Game Breaker): Novatel is a leading provider of wireless broadband-access solutions. The company has delivered advance samples of both its EV-DO and HSDPA ExpressCards to potential customers. The cards are being developed pursuant to agreements and purchase orders from laptop manufacturers and major cellular carriers. (EV-DO and HSDPA are high-speed wireless Internet standards; ExpressCards are a smaller and faster version of already-marketed wireless cards and will be the norm in newer notebook computers.) We believe steady growth in the company's European markets (55% of 2005 sales) and continued strong demand from Verizon Wireless in the U.S. will drive second-half 2006 revenue 25% higher than first-half revenue. In addition, the company's embedded products are now shipping in Dell PCs, which should drive strong volume growth in the second half of this year and into 2007. At just 17 times the Street's 2007 earnings estimates, the stock has attractive upside potential for long positions.

Online Resources (ORCC:Nasdaq, $12.61, 400 shares, 4.35%, Stealth Stock): The company is a payment-services firm that enables small and midsized financial institutions to offer online banking services to their clients. We believe shares remain attractively valued and that investors have not yet priced in the company's recent acquisition of privately held Princeton eCOM, a digital payments processing company. The combined entity can now process more than 200 million transactions over the next year, making Online Resources the largest play in the rapidly growing online bill-payment processing space. Even with the acquisition, management is targeting long-term EBITDA margins of 30% to 35%, up meaningfully from its trailing 12-month level of 20.5%. As such, we suspect the Street's 2007 earnings estimate of 42 cents, while up 40% from 2006 estimates, will prove to be on the low side. As such, Online Resources remains a One this week.

Vasco Data Security International (VDSI:Nasdaq, $8.62, 600 shares, 4.46%, Stealth Stock): Vasco's technology enables secure online financial and other transactions. On Wednesday, research firm Jefferies issued a bullish report that highlighted Vasco's accelerating business deal pipeline and favorable competitive position, which enables the company to benefit by offering the industry's lowest-cost software solutions. Vasco's for-the-Web product called Digipass, expected to be released within the next month, is an excellent example of the company meeting the demands of its customers at nearly a 50% discount to competing products. Even so, Vasco has maintained nearly twice the operating margin of its competitors through strong cost controls and excellent management execution. The Jefferies report also speculated that Citibank doubled its recent 100,000-unit order to 200,000 units, which would likely add $1.5 million to $2 million in revenue over the next two quarters.

TWOS

Allscripts (MDRX:Nasdaq, $17.86, 200 shares, 3.08%, Game Breaker): The company makes software that allows physicians to write prescriptions, order tests, see results and check pharmaceutical interactions using wireless personal digital assistants (PDAs). Allscripts has added a plethora of customers this year, announcing deals with physician groups in Florida, New York and Maryland in May alone. In addition, the recently closed acquisition of A4 Health Systems compliments Allscripts' existing electronic health-records software, which should help increase the company's total addressable market for the foreseeable future. Allscripts is capitalizing on the growing demand for automation and digitization of medical records in the health care industry. Shares are currently trading at 22 times the Street's 2007 earnings consensus, which is not cheap enough to warrant a One rating. We will add to our stake at $15 a share and book gains above the $20 level.

Emcore (EMKR:Nasdaq, $9.98, 300 shares, 2.58%, Game Breaker): Emcore is a leading provider of optical equipment and is expanding its solar business beyond the satellite market into the commercial power market. We expect the company can grow its revenue by 35% and 40% in 2006 and 2007, respectively, driven primarily by demand for its gallium arsenide-based solar panels, which are gaining market share due to a shortage in polysilicon. In addition, the company's optical equipment business should experience sold second-half 2006 growth as customer Cisco (CSCO) rolls out its next-generation of network equipment in September. We remain positive on shares, but will wait for a trade closer to $8 before moving Emcore back to a One rating.

Grey Wolf (GW:Amex, $7.85, 800 shares, 5.41%, Stealth Stock): Grey Wolf drills for oil and natural gas in the continental U.S. Continued high oil and gas prices are driving exploration and production budgets higher, which has created a constant demand for drilling rigs. Grey Wolf is benefiting from increasing day rates, which are fees it charges customers for its rigs, as well as improved margins on term contracts that are renewing at higher day rates. Approximately half of Grey Wolf's rigs were up for contract renewals in the first half of 2006, which bodes well for earnings in the second half of 2006. At just 7 times the Street's 2007 consensus earnings forecast, the stock is a compelling value for long-term investors. Even so, we will book some gains near $8.50, given the large size of our position.

MTR Gaming (MNTG:Nasdaq, $9.73, 500 shares, 4.19%, Stealth Stock): MTR Gaming operates horse racetracks, casinos and hotels in the U.S. There is nothing new to report this week as we wait for updates regarding the company's pursuit of strategic alternatives, including a potential sale of the company. Management had previously offered to take the company private at $9.50 a share in 2005, but a special advisory committee to the board of directors found the offering price inadequate. MTR plans to open a new gaming facility in Pennsylvania later this year, which should boost annual cash flow to $100 million by the end of 2007 from just $50 million today. As such, we believe significant upside exists in shares as investors take into account the company's strong growth prospects. Even so, we will look to book gains above $10 a share. We don't see any near-term catalysts to drive shares meaningfully higher, and believe our capital can be better deployed elsewhere.

Smith Micro (SMSI:Nasdaq, $14.24, 200 shares, 2.45%, Game Breaker): The company is a leading provider of software to Verizon Wireless and other carriers to enable access to high-speed data networks and bandwidth-optimized data downloads. With the shares rallying more than 8% Thursday, we felt it was prudent to trim 100 shares from our 300-share position. Earlier in the day Thursday, the company filed to sell 384,897 shares of common stock in a public offering for managers of PhoTags, a company Smith Micro acquired in April. Smith Micro didn't receive any proceeds from the offering, though the deal was not terribly dilutive to current shareholders. Smith Micro shares remain compelling at only 16 times Street-high earnings estimates from research firm C.E. Unterberg, Towbin for 2007 of 80 cents a share. We will wait for a decline to $13 a share before adding to our stake. As such, we continue to rate Smith Micro a Two this week.

William Gabrielski is a research analyst at TheStreet.com.

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