Stocks Under $10 Weekly Summary

The major indices touched record highs again this week, after the Fed minutes indicated that further easing could take place in the short term. However, third-quarter earnings season is now under way, and analysts project that the average profits for S&P 500 companies will be at their lowest levels in five years.

Starting with the positives, the market continues to push ahead, pricing in further interest rate cuts. Also, growth outside of the U.S. is surging and the weaker dollar is benefiting companies with international exposure, as we saw with recent upbeat reports from McDonald's (MCD) and Shaw Group (SGR) .

On the negative side, housing is showing no signs of a bottom, and S&P 500 earnings for the current quarter -- which will likely come in ahead of estimates -- are trending lower. Consumer spending is slowing and most retailers are feeling the pressure, although most attribute the recent weakness to warmer-than-usual weather.

As we've mentioned in past Weekly Summaries, there are too many risks in the marketplace for the major indices to be trading at record highs. Housing was a clear driver of growth from 2002-05, which led to a sharp increase in consumer spending and accounts for more than two-thirds of gross domestic product.

This is no longer a catalyst for growth, and will not be for at least two years from now or until we see stabilization in this market. For those who want more details on specific housing stocks, check out the first two parts of a five-part series on TheStreet.com TV analyzing 10 of the top homebuilders and which ones are positioned for long-term growth.

Looking at small-caps, we have been able to avoid the retail meltdown in single-digit retail stocks as well as homebuilders and mortgage related issues. Our thesis for the Stocks Under $10 newsletter relies on companies with a favorable risk/reward, and almost all of the stocks in these sectors -- despite their huge selloffs -- are not worth buying.

Heading into earnings season, we will offer detailed previews on what to expect for each of our positions in the model portfolio. Also, we will be updating our Watch List accordingly during this extremely volatile season.

For the week, the Dow gained 0.19%, the Nasdaq advanced 0.91%, the S&P tacked on 0.27%, and the Russell 2000 lost 0.44%.

Turning to the model portfolio, it was a quiet week as we didn't make any moves. However, there was some important news to report on a couple of names.

On Monday, Vasco Data Security VDSI moved higher on a bullish analyst report, and Taser TASR saw a nice gain after announcing two new orders. On Wednesday, we aired our first video mailbag on TheStreet.com TV, where we answered reader questions on several of the model portfolio positions.

On Thursday, Newpark Resources (NR) jumped 8% after announcing the sale of its environmental services unit. And on Friday, we sent an Alert describing the importance of listening to companies' quarterly earnings conference calls and how they can lead to new investment ideas. Turning to our Watch List, this week we added MRV Communications (MRVC) and NexCen Brands (NEXC) and deleted Yamana Gold (AUY) , Delia's DLIA, and China Fire & Security (CFSG) . Also, we are currently running screens for small-cap biotech plays, and any names that interest us will be added to our list in the coming weeks.

Other names that are holding our interest include Actuate (ACTU) , Atmel (ATML) , China GrenTech (GRRF:Nasdaq ADS), Emageon (EMAG) , Great Lakes Dredge & Dock (GLDD) , Health Management Associates (HMA) , Jamba (JMBA) , Level 3 (LVLT) , LSI Corp. (LSI) , Nautilus (NLS) , Oilsands Quest (BQI) , Packeteer PKTR, Rite Aid (RAD) , Skillsoft (SKIL) , Techwell (TWLL) and U.S. Auto Parts (PRTS) .

Now let's take a look at the model portfolio.

One quick note: Ones are stocks we would buy now, while Twos are stocks we would buy only on a pullback from current levels, or stocks we are looking to sell. 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 have catalysts to boost their share prices.

ONES

Bruker BioSciences (BRKR:Nasdaq, $9.03; 700 shares; 4.46% of the portfolio; Stealth Stock): Bruker makes a wide array of scientific equipment used in analyzing substances in fields including pharmaceuticals, biotechnology and semiconductor manufacturing. Based on technologies ranging from X-rays to mass spectroscopy, Bruker's machines stand to benefit from increased demand from corporations, universities and governments for use in research and analysis. On Monday, Bruker presented at the Human Proteome Organization's 6th Annual World Congress, where the company showed off its latest applications for proteomics mass spectroscopy. Despite its esoteric nature, the field of mass spectroscopy is fairly competitive. We believe Bruker has secured a place at the front of the pack in terms of technological advancement and paying special attention to the needs of its consumers. Our bullish thesis for this position centers on increasing demand for high-technology research equipment in biotechnology and many other fields, from semiconductors to military applications. We believe Bruker's strong market position will drive positive financial results over the next year, pushing shares well above the $10 level.

China Direct (CDS:Amex, $9.90; 500 shares, 3.49%; Stealth Stock): China Direct operates as a management company with a consulting segment. The company takes majority stakes in small- to medium-sized Chinese businesses that are looking for additional capital and an experienced partner to help nurture a high rate of earnings growth, in order to ultimately access the U.S. financial markets. On Tuesday, we provided subscribers with our take on the stock's sharp rally following the initiation of our model portfolio position last Friday. As of today, shares have now pulled back below $10. We see continuing high volatility in shares of China Direct and believe the best course of action for investors is to leave room to add to the position in case shares sell off sharply. The company is extremely attractive on a long-term basis, as its business model allows it to take majority stakes in growing businesses at attractive prices, with a number of performance targets that each company must hit before China Direct will invest additional money. This position is one of our riskiest plays in the model portfolio, but we also believe it carries above-average long-term potential.

Elixir Gaming (EGT:Amex, $4.19; 1,500 shares, 4.44%; Stealth Stock): Elixir Gaming -- which was formed through a securities purchase and product agreement between Elixir Group and VendingData -- manufactures and distributes products, including slot machines, and services to the gaming industry. Shares trended lower this week on little news. Two weeks ago, Elixir announced that it had delivered agreements for the placement of 700 slot machines at the Manila Prince Hotel & Casino and the Isis Slot Club, which are both located in the Philippine capital of Manila. These orders are the first of many, given that new casinos are set to open across Asia in the coming years. Elixir is one of our more speculative plays in the portfolio -- due to limited analyst coverage and a lack of news flow -- but we believe the potential reward is well worth the risk.

First Consulting Group (FCGI:Nasdaq, $10.15; 800 shares, 5.73%; Inflection Point): The company provides outsourcing and consulting services to the health care industry. These businesses include clinical process improvement, business process outsourcing and application hosting services. Shares tumbled early in 2007 after First Consulting announced the loss of a major customer, the University of Pennsylvania Hospital System (UPHS). We believe the company will continue to benefit from consistent demand from health care providers looking to maximize efficiencies. With the loss of UPHS fully priced into shares, investors can now focus on First Consulting's life sciences and health plans segments, which have shown solid business momentum this year. Shares remain attractive for long-term investors.

Flow International (FLOW:Nasdaq, $9.25; 750 shares, 4.90%; Stealth Stock): Flow is the world leader in the development and manufacture of ultrahigh-pressure (UHP) waterjet technology, which can cut virtually any hard material, including metal, composites, stone, plastics, rubber and glass. On Wednesday, Boeing (BA) announced that the initial delivery for its 787 Dreamliner will be delayed for six months. Flow waterjet systems are used by Boeing, and the delay could cause a temporary miss in Flow's next-quarter earnings. However, these order delays are short term in nature, and our long-term thesis remains intact. Aerospace remains a major catalyst for Flow, and the company is seeing increasing demand for its new HyperPressure 87000 waterjet. We believe the stock has long-term price appreciation potential and maintain our One rating.

Luby's (LUB:NYSE, $11.00; 600 shares, 4.66%; Inflection Point): The company operates more than 120 cafeteria-style restaurants in Texas that primarily serve a value-oriented clientele. Shares dipped below $11 this week on little news. Luby's owns more than 70% of its stores -- most of which are in the process of being remodeled. The company has strong financials, including $25 million in cash and relatively no debt. Also, Luby's could be viewed as a growth play, given that it's expanding its restaurant base into universities and hospitals. The company is scheduled to report fourth-quarter earnings results next Thursday after the close, and we will have a detailed preview on what to expect.

Newpark Resources (NR:NYSE, $6.07; 1,000 shares, 4.28%; Inflection Point): The company provides integrated fluids management, environmental and oilfield services to the oil and gas exploration and production industry. On Thursday, Newpark announced that it has reached an agreement to sell its environmental services business to Trinity TLM Acquisitions for $81.5 million in cash. Also included in the agreement is a five-year provision that could allow Newpark to earn an additional $8 million. As we mentioned in a past Alert, Newpark's environmental division accounted for 10% of the previous quarter's revenue, and while the news of the sale comes as no surprise -- given that management announced its intentions to do so in March -- the price it sold for came in at the high end of analysts' estimates. This sale will allow Newpark to focus more on its drilling fluids and mats and integrated services businesses, as these are the main growth drivers of the company. We believe this sale increases the likelihood of a takeover, now that the company is solely focused on equipment and services and will have a better-looking balance sheet. Also, the company has 1,800 experienced engineers, which is a huge asset that's in high demand given the shortage of such workers in this industry.

Sirius Satellite Radio (SIRI:Nasdaq, $3.54; 2,400 shares; 6.00%; Inflection Point): The company provides satellite radio services in the U.S. Sirius offers commercial-free music channels across all music genres as well as sports, news, talk and entertainment channels. Shares surged this week after Citigroup published a report suggesting that the current synergies between the proposed Sirius and XM Satellite Radio (XMSR) merger could amount to $7 billion in cost savings over 10 years, just by reducing duplicate programming and marketing costs. Also, Citigroup believes the odds of this deal being approved are 60% -- much more that the 24% that the market consensus suggests. As we mentioned in past Alerts, we believe that Sirius and XM have satisfied all the necessary requirements to get this merger approved. Based on our original thesis, we believed the stock was worth $4.50 in the short term if the merger were approved, and the downside risk was $2.70. As it turns out, it appears that the risk/reward may be much more favorable considering that some analysts believe the stock is worth more than $3.50 -- minus a merger approval.

Standard Motor Products (SMP:NYSE, $9.48: 800 shares, 5.35%; Stealth Stock): The company is a leading independent manufacturer and distributor of replacement parts in the automotive aftermarket (retail) industry. Serving North America, Latin America and Europe, Standard Motor's core businesses include engine management and temperature control. There has been little news on the company over the past two weeks as shares have been stuck in the $9.50 to $10 range. A few weeks ago, Bear Stearns said that it reduced its stake in Standard to less then 2%, from its 11% stake it held in March. This explained the huge selling pressure that caused shares to fall by more than 50% since May. Without this selling pressure and the fact that the company recently increased its buyback of shares by $3.3 million, we believe the stock has very high price-appreciation potential as the replacement-part industry continues to grow.

TWOS

DynCorp (DCP:NYSE, $23.60; 150 shares; 2.50%; Stealth Stock): DynCorp is an outsourcing and infrastructure company that provides services to the U.S. and foreign governments. Shares touched an all-time high this week on little news. DynCorp remains in the sweet spot of the defense budget as training police forces in Iraq in order to get more U.S. troops back home has become a high priority. The company has positioned itself as a major player in the defense industry, which would likely lead to additional future contracts. DynCorp has been a stellar performer for us over the past year, and we believe shares have long-term price appreciation potential. However, we maintain our Two rating given that the stock is up more then 125% since we initiated our position.

Lawson Software (LWSN:Nasdaq, $10.34; 400 shares; 2.92%; Inflection Point): Lawson is a leading provider of enterprise resource planning (ERP) software that integrates data from different departments within a company, making the data accessible for quick analysis. We like Lawson as an alternative to Oracle (ORCL) and SAP (SAP:NYSE ADR), which are the dominant players in the ERP software industry. Shares recovered this week, recapturing the decline that followed the company's first-quarter results last Thursday. As we said last week, we remain positive on Lawson due to its strong position in its niche industries like retail and manufacturing, but are still waiting for some sign that business is shifting into high gear. We would wait for a pullback before adding to our stake. Online Resources (ORCC:Nasdaq, $13.20; 400 shares; 3.73%; Stealth Stock): The company is a payment-services firm that enables small and midsized financial institutions to offer online banking services to their clients. Online Resources is in an advantageous position, having direct relationships with both banking customers and bill-payment networks. Our thesis for this position is based on the company's operations in both the online banking and bill payment markets, especially its access to the "biller" side of the market. Shares of Online Resources traded relatively flat this week as investors await the company's third-quarter results, which we expect the company to report near the end of October. Although we believe the company has the potential to benefit from cross-selling and operating efficiencies between its segments, the strong financial results that we've been looking for have been slow to develop. We plan on keeping our Two rating on this name until we see signs of stronger business momentum. Sun Microsystems (JAVA:Nasdaq, $6.23; 950 shares; 4.18%; Inflection Point): The company offers network-computing solutions, including servers, storage, software and services worldwide. Shares continue to move higher and are now trading above the $6 level. As we've mentioned in past Alerts, Sun's focus has turned from restructuring and improving its image -- which has been successful thus far -- to new product growth. For most of our picks, our thesis is long-term-oriented, but Sun's next quarter -- which will likely be reported toward the end of the month -- will be significant. As evidenced by the four sell ratings and nine hold ratings out of the 21 analysts covering the stock, there is not too much optimism heading into the quarter. We will maintain our Two rating until we get a clearer picture of new product development in next quarter's conference call. Taser International (TASR:Nasdaq, $17.85; 500 shares; 6.30%; Stealth Stock): The company sells electronic control devices for use primarily by law enforcement, military and security personnel, but also for personal protection. On Monday, Taser announced that the sheriff's office in Jacksonville, Fla., ordered 450 Taser X26 electronic control devices and related accessories, and Cleveland's police division ordered 175 of the devices. These orders highlight Taser's domestic potential that we have described in past Alerts. Also, the company will likely see new orders internationally, notably from France, in the short term. We have noted Taser's huge growth potential numerous times, but we maintain our Two rating as shares are up more than 120% since we initiated our position in the model portfolio. Vasco Data Security International (VDSI:Nasdaq, $42.02; 150 shares; 4.45%; Stealth Stock): The company is a leading supplier of token- and software-based security products that enable secure online financial and other transactions. Vasco's technology has been in high demand as banks and other financial institutions are using authentication devices and secure Web-based applications to protect themselves and their customers from identity theft. Shares of Vasco continued their seemingly unstoppable run higher this week, blowing past the $40 level. Our thesis regarding the company's excellent position to benefit from strong demand for security and authentication products has worked out well, with management controlling costs and posting excellent financial results for four straight quarters. In spite of valuation concerns, we plan on being patient with regard to taking profits in this winner.

Xoma (XOMA:Nasdaq, $4.27; 2,000 shares; 6.03%; Stealth Stock): The company researches and develops therapeutic antibody treatments for conditions ranging from psoriasis to cancer. Xoma's pipeline boasts a number of early-stage proprietary treatments as well as partnered therapies that have already gone to market and generate royalty revenue for the company. On Monday, Xoma announced that current CEO and President Steven Engle has been appointed chairman of its board of directors. Engle took the role of CEO in August of this year, and we believe his appointment as chairman is an indication of the progress the company has made in transitioning into a new era following the retirement of longtime CEO Jack Castello. Shares of Xoma set a new 52-week high this week, and we remain positive on the company based on its combination of revenue-generating research agreements with major pharmaceutical firms, including Pfizer (PFE) , as well as early-stage treatments that have the potential to go to market years from now. In spite of our bullish stance, we have no plans to add to this position given that shares have more than doubled over the past two months.

Frank Curzio is a research associate at TheStreet.com.

TheStreet.com is a publisher and a registered investment adviser. TheStreet.com Stocks Under $10 contains the authors' own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You further understand that the Stocks Under $10 Investment Team will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in TheStreet.com Stocks Under $10 may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Past results are not necessarily indicative of futureperformance. Investing in the stocks chosen forTheStreet.com Stocks Under $10 model portfolio is riskyand speculative. The companies may have limited operatinghistories and little available public information, and thestocks they issue may be volatile and illiquid. Trading insuch securities can result in immediate and substantial losses of the capital invested. You should use only risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. As an editorial employee of TheStreet.com, Curzio is restricted from owning individual securities other than stock or options in TheStreet.com, Inc.

-----------------------------------------------------------Visit the TheStreet.com Stocks Under $10 site (available to subscribers ONLY) by clicking here: http://www.thestreet.com/k/su/index.html

To view TheStreet.com Stocks Under $10 portfolio on theWeb, click here:http://www.thestreet.com/k/su/portfolio.html

For customer service on your account please visit:https://secure2.thestreet.com/cap/selfserve/

-----------------------------------------------------------

(c) 2007 TheStreet.com, Inc., 14 Wall Street, 15th Floor,New York, NY 10005, Attention: Customer Service Department