Stocks Under $10 Weekly Summary

Last week we closed the books on September and the third quarter, and over the last three months the S&P 500 rose almost 4%. By comparison, the Dow Jones Industrial Average and Nasdaq Composite Index climbed nearly 5% and just under 6%, respectively.

In the Stocks Under $10 portfolio, we had a number of positons that performed far better than the major indices, including AcelRx Pharmaceuticals (ACRX) , which more than doubled, AXT Inc. (AXTI) , which rose 44% during the last three months, as well as USA Technologies (USAT) , which climbed more than 20% and is approaching our price target. We booked some profits during the quarter in AcelRx, Amplify Snacks BETR, USA Technologies and Sirius XM (SIRI) . To be fair, the portfolio did have some "problem children" during the quarter, but we used the weakness in Teligent (TLGT) and Amplify Snacks to improve our cost basis for the medium to longer term. The same goes for shares of recently added Nokia (NOK) as well as Yamana Gold (AUY) , Inovio Pharmaceuticals (INO) , Hudson Technologies (HDSN) , and Zix Corp. (ZIXI) . Aside from the active positions we held during the quarter, we added several names to the Bullpen during the last three months, with a few of them later called up into the portfolio. We’ll continue to hunt for fresh opportunities as well as identify contenders that we’d be buyers of at better prices.

The last week of the quarter was filled with the usual late-in-the-month economic data as well as the latest take on the economy's speed in the second quarter. Per that GDP update, the economy grew at a 3.1% annual rate in the second quarter, but even before the bout of hurricanes in late August and early September, the economy was again slowing. We saw this reflected in the August housing data received last week, as well as the sequential dip in August core capital-goods orders. Even Friday's personal income and spending data for August showed anemic progress in wages and spending compared to the last few months and continued "low-flation."

Here's the thing: That latest low-flation figure comes in the Fed's preferred inflation metric -- the core PCE price index -- and raises questions over the central bank's recently shared interest rate hike forecast calling for four such moves before the end of 2018. As one person said last week, and we agree, let's not confuse the Fed's forecast with economic facts. Too often in recent years, we've seen the Fed forecast several rate hikes only to squeeze one in at best.

As we remain data-dependent and assess the impact of the Fed's balance sheet unwinding, we'll be sure to consider the simple fact that we are late in the current business cycle and this likely has the Fed looking to put as many arrows in its policy quiver as possible ahead of the next eventual recession. In the coming paragraphs, we point to the oncoming September data that will see the fuller effect of the hurricanes and discuss what that likely means for third-quarter GDP expectations.

Before we tackle that, however, let's touch on last week's big news out of Washington -- the first cut from the GOP on tax reform. Once again, the opening salvo came up short on details, and is already poised for some opposition in high-tax states like New York and New Jersey. Given the lack of movement in the stock market indices as that proposed program was introduced, we would say the market is once again looking for more details to wrap its arm around before coming to any conclusions. We are in that same camp. In a few weeks, we'll start the time-honored tradition of corporate earnings season, but ahead of that we're poised to get a number of data points that will tell us how the domestic economy fared in September. As we touched on above, September had three major hurricanes that impacted various parts of the U.S., and economists estimate that Harvey and Irma could cut as much as six-tenths of a percentage point from GDP growth in the third quarter. At the same time, we're seeing both oil prices and the dollar rebound, and these could turn some recent tailwinds into headwinds for the economy and businesses.

The data this week and the few weeks after will give us a better sense of how deep that hurricane-related cut to GDP really is as well as provide a fuller picture of exactly how the economy and businesses fared in September. If the quarterly results from Darden (DRI) last week were an indication, it means expectations do not fully reflect the extent of the disruption.

The economic data flow starts this week when we get the usual start-of-the-month data for September -- ISM Manufacturing, auto and truck sales, ISM Services, and several looks at job creation during the month, including the all-important one from the Bureau of Labor Statistics. As we digest these reports and those that follow, we'll be tabulating the impact to third-quarter GDP expectations at the Atlanta Federal Reserve and the New York Federal Reserve. Even before the week's data are published, we'd point out the Atlanta Fed has already taken a hatchet to its third-quarter GDP forecast, dropping it to 2.3% last week from 4.0% on Aug. 3. Not quite the vector or velocity one would associate with the continued climb in the domestic stock market, but the Atlanta Fed is not alone in its revisions as the New York Fed sees the economy cruising along at a breezy 1.6%, down from 2.2% as we entered September. Again, these Fed forecasts are updated as the economic data are reported and this likely means we will be seeing even more downward revisions in the coming weeks.

Getting back to Darden's quarterly results, we see it as simply setting the stage for the coming weeks at retailers, restaurants and other companies affected by the both Harvey and Irma. Also last week, when Nike (NKE) reported its quarterly results, it shared that one of the key margin headwinds it will be facing will be FX. We heard this again from spice and marinade company McCormick & Co. (MKC) during its quarterly earnings when it shared expectations for an unfavorable currency impact of 1%. As we mentioned above, of late the dollar has reversed course and strengthened, which is likely to take some fuel out of the tank that powered shares of multinational companies, like Nike and McCormick, higher through most of the third quarter. We’ll be assessing further moves and what it may mean for companies in the portfolio like AXT Inc. and Nokia that have more international exposure than others.

We'll be looking to wrap our collective arms around those two issues as well as others as we dive into the earnings reports this week. As we look to assess the dollar's next move, it means paying attention to any and all Federal Reserve tea leaves. That has us keeping tabs on what Fed Chair Janet Yellen says on Wednesday, Oct. 4, as well as what several other Fed heads, including James Bullard, Robert Kaplan and John Williams, have to share about the economy and monetary policy during planned speeches this week. While some may be expecting a pre-earnings calm, we'll be taking pencil to paper and revisiting expectations, as well as building our shopping list for companies we'd be inclined to scoop up at better prices.

Below is a rundown of our current positions. Figures in parentheses are each stock's Friday closing price and percentage weighting in the model portfolio. (For the most up-to-date portfolio results, please click here.)

As a reminder: -- A Game Breaker stock is one that we believe is going to change the landscape of an industry, as Microsoft (MSFT) and Walmart (WMT) did in their respective sectors. Investors can make big money in these stocks by getting in before the crowd does.

-- Inflection Point stocks have broken business models that are on the mend but that the market has yet to recognize. Investors who recognize these turnarounds early can pocket strong returns.

-- Stealth stocks are often unknown to the general public but can be hugely profitable investments, especially when they have catalysts to boost their share prices.

-- One stocks are those that we would buy at current prices. Twos are stocks that we would buy on pullbacks and Threes are names that we would sell into strength.

ONES

Antares Pharma (ATRS:Nasdaq; $3.24; 3.16%): This firm develops drug-delivery systems for its own clinical products and for generic-drug partners. Last week, ATRS shares soared 8%, bringing their quarter-to-date move into the green, albeit modestly. We suspect that move was largely due to Antares telling its story at the Ladenburg Thalmann 2017 Healthcare Conference last Wednesday. For us, the focal point for the shares remains the FDA PDUFA (Prescription Drug User Fee Act) date of Oct. 20 for Xyosted and, assuming FDA approval, the company expects to fire up operations on Dec. 1. We see securing approval for this product as the key for the stock in the coming quarters, but the Dec. 1 date leaves only a modest amount of time for revenue contribution in the December quarter. As those expectations get reset and we approach that PDUFA date, we'll look to opportunistically add to the position. ATRS is a Stealth Stock and has a $5 price target.

AXT, Inc. (AXTI:Nasdaq; $9.15; 3.47%): Products of this compound semiconductor substrate manufacturer are used in a wide variety of technology applications. The stock climbed another 6% last week, bringing the quarter return to 44%. As we shared last week, we saw the 2017 Analyst Day held by Applied Materials pointing to a robust outlook for AXT’s substrates, the basic building block for RF semiconductors. Helping along the way, third-party research reports cited the need to build out wireline/fiber infrastructure ahead of active 5G deployments, another positive for substrate demand at AXT. We continue to rate AXTI shares a One with an $11 price target. All things being equal, we would look to revisit that rating if the shares cross the $10 level.

LSI Industries (LYTS:Nasdaq; $6.61; 2.73%): LYTS shares continued to creep higher last week, bringing the position's return to more than 11% since we added the shared on Sept. 14. Even after that quick climb, we have ample upside to our $10 price target, which keeps our One rating intact. As a reminder, our thesis on the shares centers on the company benefiting from post-hurricane rebuilding efforts in the coming quarters as well as the structural shift that favors the adoption of green-friendly light-emitting diode technology at the expense of other forms of lighting (incandescent, cathode ray tube). Regarding the latter, last week Philips Lighting published a study showing businesses around the world could realize savings of up to $1.5 trillion in reduced rental costs alone if their office buildings were refurbished with LED lighting systems and other smart technology. We certainly see this as a positive data point for this stealth stock.

Marrone Bio Innovations (MBII:Nasdaq; $1.15; 0.53%): This stock traded sideways for most of the week before giving up a few pennies. The firm is scheduled to present at The MicroCap Conference in New York City this Thursday. Look for possible news after 10:30 ET. We are maintaining our price target of $1.75.

Nokia (NOK:NYSE; $5.98; 3.48%): Shares of this wireless infrastructure and intellectual property licensing business dipped last week, and we used the combined move lower since adding the shares to add to our position. While we continue to see the matriculation of 5G technology that should lead to a rebound in the company’s wireless infrastructure business, we also recognize the power of the high-margin IP licensing business via companies such as Qualcomm (QCOM) and InterDigital (IDCC) . As such, we are inclined to be patient investors. Signposts we’ll be watching for Nokia Technologies include 5G deployments for both networks and handsets as well as digital health and augmented/virtual reality. What's more, 5G deployments also bode well for the company’s wireless infrastructure business. Our price target on NOK shares is $8.50 and we rate the shares a One. We’re inclined to add to the position, and would be aggressive buyers closer to $5.50 for this Inflection Point stock.

Teligent (TLGT:Nasdaq; $6.71; 3.13%): This Stealth Stock and maker of generic pharmaceuticals traded off more than 2% during the last week of the quarter, bringing its return over the last three months to a decline of more than 25%. After weeks of watching the shares move lower following the recent admission by the company it was hitting regulatory speed bumps that would impact applications by one to two quarters, we scaled into the position last week following the company recently receiving its fifth FDA approved product (Triamcinolone Acetonide Cream USP) this year. This new addition is slated to launch in the fourth quarter, and we’ll look for updates on that when the company reports its quarterly earnings in the coming weeks. We continue to evaluate scaling further into this position, given our $10 price target as it would improve our overall cost basis.

Zix (ZIXI:Nasdaq; $4.89; 4.25%): Zix is a leading producer of email-encryption software that enables doctors to securely send information to pharmacies. We view the looming issue of doctors migrating from paper to digital and cloud-based solutions expanding the risk of cyberattacks and hacking incidents. We were reminded of that given the recent Equifax (EFX) breach as well as those at Amazon’s (AMZN) Whole Foods and Sonic Corp. (SONC) . Given those reports as well as the new, more comprehensive report from Gemalto, we scaled into ZIXI shares earlier today. While we see Zix’s business benefiting from this tailwind, we continue to wait for more details surrounding its recent acquisition. Zix exited the June quarter with $29.5 million in net cash (just over $0.50 per share), almost $80 million in backlog and generating positive cash flow. Backing out the net cash per share, the stock is trading at far less than 14 times 2018 EPS estimates. With the shares offering potential upside of more than 25% to our $6.25 price target, we continue to rate them a One.

TWOS

AcelRx Pharmaceuticals (ACRX:Nasdaq; $4.60; 2.53%): The stock soared last week, with an enthusiastic push higher solidified later in the week. Safe to say that AcelRx's presentation at the Cantor Fitzgerald Global Healthcare Conference place in New York City went well. The stock has scored a rough 43% gain in just a little more than a week. We took a hefty profit on one-third of our total long last week, and are still hanging with our $5 price target. That said, we may watch the action in the early going this week, even if our target is reached.

Air Industries Group (AIRI:Nasdaq; $1.42; 0.67%): This defense contractor performed well again last week. AIRI will go through a secondary offering lock-up expiration this Thursday. How much of a threat is this? Well, we will know that if those long the name want out here, we then have a problem. We still have a $2 price target.

Amplify Snack Brands (BETR:NYSE; $7.09; 4.03%): This company is a play on the shifting consumer preference for food that is good for you. Last week BETR shares rebounded 5%. From a fundamental perspective, we continue to see Amplify’s business benefiting from the shift to healthy snacking as well as its product and geographic expansion plans. This has us keeping the shares in the portfolio despite them being one of the bigger underperformers during the third quarter. As we have said, we see Amplify as a potential acquisition candidate for PepsiCo (PEP) , Snyder's-Lance (LNCE) , Post Holdings (POST) , General Mills (GIS) or another snack-food company as they look to expand their presence in the “better for you food” snacking category. At just over 4% of the overall portfolio, we have room to scale further into the position. BETR is a Stealth Stock.

Enzo BioChem (ENZ:NYSE; $10.47; 0.96%): Enzo delivers and applies technology to produce products and services for an array of clientele. Enzo released quarterly earnings last Wednesday night, beating expectations for both EPS as well as revenue. Posted revenue showed a 6% year-over-year increase. The stock rallied into these earnings, but promptly sold off back down to levels seen just a day earlier. The business is healthy. There was no broad mention of any benefit seen from pending patent cases. For now, our $15 price target stands.

Inovio Pharmaceuticals (INO:Nasdaq; $6.34; 6.06%): Inovio is a clinical-stage pharma company involved in developing deoxyribonucleic acid (DNA) immunotherapies and vaccines focused on treating and preventing cancers and infectious diseases. The stock grinded its way higher all last week in the wake of several presentations made by CEO Kim. The stock continues to heal, and we believe it will. We reiterate our $9 price target on this stock.

Pixelworks (PXLW:Nasdaq; $4.71; 3.50%): Pixelworks primarily designs, develops, and markets video & pixel processing semiconductors. The stock sold off fairly hard into week's end after posting solid gains earlier. No news was released, and management remained quiet. That said, PXLW bears watching. Our price target remains $6.50 for now.

USA Technologies (USAT:Nasdaq; $6.25; 2.18%): The company provides end-to-end electronic payment and machine-to-machine and Internet of Things solutions for the small-ticket, unattended retail market, a traditionally cash-only sector that continues to transition to cashless payments. Last week USAT shares surged more than 13% following what we surmised to have been an upbeat presentation at the Barrington 10th Annual Fall Conference. Our response is to bump our price target to $6.50 from $6.00, and we will monitor additional data points for more upside. With less than 10% to our new price target, we would not commit additional capital at current levels to this Stealth stock.

Yamana Gold (AUY:NYSE; $2.65; 4.33%): This gold-and-copper exploration-and-production company operates seven mines and develops projects in Argentina, Brazil and Chile. After climbing steadily in August and early September, AUY shares gave back additional ground last week. For all of the third quarter, AUY shares rose 9%. In the coming weeks, we’ll receive more data that is likely to lead to further third-quarter GDP revisions, and also show the reverberations of the recent hurricanes on corporate earnings. We view this, along with the ongoing geopolitical dance with North Korea, keeping the market on its toes. As such, we will hold AUY. AUY is an Inflection Point stock; we will continue to monitor gold prices vs. our $6 price target.

THREES

Hudson Technologies (HDSN:Nasdaq; $7.81; 1.06%): Hudson is a refrigerant services company selling industrial gases, refrigerant management, and system decontamination services. As you know by now, we cancelled the price target last week, and downgraded the stock to Three from Two, as we try to intelligently exit the name. Would love to see an $8 price tag or better.

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