Stocks Under $10 Weekly Summary

This week the major market averages had their best performance in six months, on tame inflationary reports and a 4% decline in crude oil. Despite some profit-taking on Friday, the Dow, S&P 500 and Nasdaq all tacked on about 3% for the week, and some names in the model portfolio posted double-digit gains.

It's still largely expected that the Federal Reserve will raise interest rates by another 25 basis points at the end of June. That said, as long as commodity and housing prices remain in check, stocks could begin to recover on the prospect that Alan Greenspan & Co. will be finished with their increases by the end of the summer.

Earnings activity slowed this week, but the retailers largely delivered solid numbers. On the other hand, we continued to see high merger-and-acquisition activity across the market, especially from private investors, highlighted by the $1.1 billion buyout of Maytag (MYG) by an investor group led by private equity firm Ripplewood Holdings on Friday.

We took limited trading action this week, but did close out CGI Holding THK Thursday, taking the model portfolio back down to 20 stocks. Elsewhere, Goldcorp (GG) reported solid earnings results, while Brocade (BRCD) disappointed the market, and Tut Systems' TUTS planned acquisition of CoSine Communications (COSN) was canceled.

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

Evergreen Solar (ESLR:Nasdaq, $5.64, 500 shares, 3.46% of the portfolio, Stealth Stock): Evergreen Solar is a leader in solar power. Its patented method for developing solar power cells and panels, called String Ribbon, gives Evergreen a competitive advantage by lowering the need for high-cost silicon, making this alternative power source economically feasible. There was little news this week on Evergreen Solar, and shares ended the week 4% higher. We believe the stock will benefit in 2006 once its joint venture to develop a solar power plant with German's leading solar power company, Q-Cells, is up and running. Management predicts this will lead to a twofold jump in sales to more than $80 million for Evergreen and bring the company closer to break-even bottom-line results. As such, we continue to believe shares should be accumulated at the current quote.

Goldcorp (GG:NYSE, $12.85, 175 shares, 2.76%, Inflection Point): It was an up-and-down week for this gold play, and shares finished 4% higher for the week once the dust settled. On Monday, Goldcorp announced that first-quarter earnings results grew 33% year over year to 12 cents a share, matching analyst expectations. If recently acquired Wheaton River Minerals had been included in the results for the entire quarter, Goldcorp would have earned 19 cents a share, the company said. Gold production in the quarter increased 72% from last year, and management said it expects 2005 production to eclipse the 1 million-ounce mark. Goldcorp's industry-low cost of production was $81 an ounce, or 25% below fourth-quarter costs and a mere $4 above last year's level. We believe these results underscore the company's solid operating execution, and that Goldcorp shares should push higher over the coming quarters. Grey Wolf (GW:Amex, $5.87, 800 shares, 5.77%, Stealth Stock): Grey Wolf drills for oil and natural gas in the continental U.S. We believe the long-term supply/demand imbalance in the energy space will drive business for drillers like Grey Wolf. Given land-rig supply constraints in the drilling market today, we expect Grey Wolf to steadily increase the rates it charges customers for its equipment for the remainder of 2005 and into 2006. As such, we believe the Street is still being conservative with its 47-cent 2005 earnings estimate. We also expect Grey Wolf's current 12.5 times earnings multiple to expand toward 15 times -- implying a $7.50 share price. The current quote presents an attractive entry point for readers, as the company is also a potential takeover candidate by a larger competitor.

Imax (IMAX:Nasdaq, $9.28, 600 shares, 6.84%, Game Breaker): The company has undergone a technological transformation over the past two years that should allow it to participate in more blockbuster movie releases and increase the number of Imax-compatible theaters worldwide. Imax shares gained 5% on no news Thursday, and we expect the momentum to continue building ahead of the June 15 release of "Batman Begins." The movie is expected to be a major blockbuster and will launch simultaneously in Imax and traditional theaters. According to industry-tracking site Hollywood Stock Exchange.com, the film is expected to generate some $166 million in box office receipts in its first four weeks in theaters. If we use the example of Christmas blockbuster "Polar Express" -- which generated 22% of its $163 million in total proceeds in Imax theaters even though they accounted for just 2.2% of the total screens -- we believe "Batman Begins" could generate even greater revenue for Imax. With that in mind, we would be buying more shares for the model portfolio at these prices if we didn't already have a full position.

Lions Gate (LGF:NYSE, $10.32, 500 shares, 6.34%, Game Breaker): Lions Gate is a leading independent movie production company known for low-budget movies that generate significant returns. "Crash" turned in a solid second week in theaters, and the film should easily eclipse $25 million in box office receipts this weekend, despite being shown in half the number of theaters as major releases. This will allow Lions Gate to generate a substantial return on the $15 million it spent to produce the movie, even before figuring in the DVD release later this year. Next up for the studio is the June 24 release of "Rize", a film that should also improve Lions Gate's value as the last independent production company in the marketplace. The stock trades at a discount to other media stocks at just 10 times EBITDA, despite analyst expectations for 30%-plus EBITDA growth in fiscal 2006 (ending March). We believe the stock can ultimately trade into the low-teens, and readers should view any level below $10 as a buying opportunity.

NIC (EGOV:Nasdaq, $4.21, 1,100 shares, 5.69%, Stealth Stock): NIC designs portals for the online processing of transactions from government agencies like the Division of Motor Vehicles (DMV). NIC has also partnered with Wal-Mart (WMT) and Sears Holdings (SHLD) for its in-store point-of-service hunting and fishing license system. We believe increased adoption of new services in both of the company's distribution channels can drive the stock back over $5 in the coming months. NIC remains attractive to purchase at current prices.

Online Resources (ORCC:Nasdaq, $9.85, 400 shares, 4.84%, Stealth Stock): Online Resources is a payment-services company that enables small and midsized financial institutions to offer online banking to their clients. Its shares rallied 11% this week despite little news flow. Analysts forecast double-digit top-line growth for the company in both 2005 and 2006 while growing its operating margins by as much as 33%. Driving this operating improvement is small and midsized banks' increased focus on online banking services to keep customers from being lured away by larger banks. Online Resources recently signed one of its biggest deals ever with New York Bancorp, a subsidiary of New York Community Bancorp (NYB) , and we believe shares remain attractive to purchase up to $10, for readers with a six- to 12-month outlook.

OpenTV (OPTV:Nasdaq, $2.71, 1,500 shares, 4.99%, Stealth Stock): OpenTV is the leader in interactive television, and its technology is now in more than 55 million set-top boxes worldwide. The company is positioned to benefit from the growing rollout of interactive programming in the U.S. So far in 2005, OpenTV has announced an interactive shopping network with Sharper Image SHRP, an interactive television deal with Playboy (PLA) and an advertising deal with Comcast (CMCSA) . We believe even more deals are in the works with Comcast, the nation's largest cable provider, for OpenTV's SpotOn advertising platform that allows advertisers to target a more-receptive audience for its products. We believe the stock is a compelling way to invest in the early stages of the U.S. interactive television market, and are maintaining our One rating at current prices.

Quantum Fuel Systems (QTWW:Nasdaq, $3.70. 1,500 shares, 6.81%, Game Breaker): Quantum is a leader in the alternative fuel industry. Even though the stock has been stuck in a downtrend in 2005, losing some 39%, we continue to like the Quantum story because it is leveraged to growth in alternative-powered automobiles. The company offers the industry's leading hydrogen storage tanks, and is working with large partners like General Motors (GM) , Toyota (TM:NYSE ADR) and the U.S. government to develop new products. Investors are currently selling Quantum because of the latest pullback in oil prices, and it is viewed as a derivatives play on the dismal U.S. auto sector. We believe it is unfair to lump Quantum with the other auto suppliers, like the Delphis DPH and Visteons (VC) of the world, and argue that the Big Three automakers will have to spend heavily in the coming years to keep up with the energy efficiency gains already made by foreign producers this decade. We maintain that investors taking a position at the current quote will be rewarded in the coming year.

SunOpta (STKL:Nasdaq, $4.45, 900 shares, 4.92%, Stealth Stock): SunOpta is a leading soy and organic ingredients producer and distributor. Shares did not participate in the broader market rally this week, but still ended 2% higher. The company remains under many investors' radar screens, but is a legitimate way to play growth in the natural and organic food space, which is forecast by analysts to grow more than 20% a year for the foreseeable future. The stock is currently trading at just 0.6 times 2006 estimated sales, and with management pledging to buy back up to 5% of the shares outstanding, we see limited downside potential for SunOpta.

SupportSoft (SPRT:Nasdaq, $5.30, 700 shares, 4.55%, Inflection Point): SupportSoft provides automated service software for broadband services and systems management. We moved the stock back to a One rating last week, and shares have since rallied 14%. While there was nothing company-specific behind the upturn, investors are carefully treading back into the software sector, following a few consecutive quarters of disappointing results. SupportSoft should deliver solid profit growth in 2005 and beyond as demand for its voice, video and data automated support software grows with increased rollout in the "triple-play" from the cable and telecommunications providers. In addition, the company is taking its products into emerging markets like India where growth will likely eclipse domestic growth rates. SupportSoft remains attractive to purchase on a pullback below $5, with the stock trading at just 13 times expected full-year earnings of 21 cents a share, backing out the company's $2.70 in cash and securities.

Tibco (TIBX:Nasdaq, $6.77, 800 shares, 6.65%, Game Breaker): Tibco is a leader in integration software, though the stock price has been cut in half in 2005 following a 20% quarterly earnings shortfall in March. That said, we believe Tibco's long-term growth prospects remain intact, thanks to increased demand for its integration software from companies looking to better use data collected on various software platforms. Even with the lower consensus earnings expectations, Tibco is still expected to grow per-share profit by 50% in 2006, along with 20% sales improvement. The stock currently trades at 18 times forward earnings estimates of 38 cents a share, vs. a multiple of 20 to 30 times for competitors like Oracle (ORCL) and PeopleSoft (PSFT) . With that in mind, Tibco's valuation is compelling at the current quote.

TWOS

Allscripts (MDRX:Nasdaq, $14.68, 300 shares, 5.41% of the portfolio, Game Breaker): Allscripts makes software that allows physicians to write prescriptions, order tests, see results and check pharmaceutical interactions using wireless personal digital assistants (PDAs). The government remains firmly committed to seeing an increase in the adoption of information technology in the medical field. Allscripts, which is already the leader in e-prescribing with a 50% market share, is well-positioned to participate in the technological shift of the medical industry thanks to its industry-leading products that increase physician adoption rates of technology. Allscripts is a solid company, but we are more likely to sell some shares for a 40% gain around $15, where the stock has met resistance in the past.

Brocade (BRCD:Nasdaq, $3.93, 700 shares, 3.38%, Inflection Point): The network-storage company said on Monday it will restate 2001-04 financial results because of errors in its accounting for stock-based compensation. Though none of the restatements will affect prior sales or balance sheet data, Brocade also disclosed that the Department of Justice (DOJ) has teamed up with the SEC in an investigation of its accounting practices. Brocade fell another 11% on Friday, even though management delivered April quarter results that were largely in line with expectations. Estimates were cut by multiple analysts, and Mark Kelleher of Adams Harkness downgraded the stock to market perform from strong buy on concerns of increased competition and rising inventory levels. We believe much of the bad news is priced in at current levels, with the stock trading at just 2.3 times the $1.70 a share in cash that Brocade has on the balance sheet. The stock is also attractive at 11 times expected full-year earnings of 34 cents a share, vs. Brocade's historical average valuation of about 20 times earnings. That said, we'd hold off on buying more shares at current prices until the accounting investigation is resolved.

Geron (GERN:Nasdaq, $7.35, 700 shares, 6.32%, Game Breaker): Geron is the leader in the stem-cell space. The company has an industry-leading 200 patents and patents pending, and owns the commercial rights to any treatment developed by Dr. Hans Keirstead, who has had early success treating rats with spinal cord injuries. The stock gained 12% this week. On Wednesday, several news outlets reported that enough support exists in the U.S. House of Representatives to authorize the use of taxpayer money to fund stem-cell research. Representatives said the House could vote on HR210 before Memorial Day. This provides an important catalyst for stem-cell stocks, and we expect Geron shares will rally meaningfully in the next two weeks in anticipation of a vote. We believe risk-tolerant investors should hold a small position in Geron at the current price.

PolyOne (POL:NYSE, $6.67, 700 shares, 5.73%, Stealth Stock): PolyOne is a chemical play with a focus on plastics. On Monday, the company announced it will acquire certain assets of Novatec Plastics, which is a plastic compounder owned by PVC Container Corp. (PVCC:OTC BB). Terms of the deal were not disclosed, but this purchase demonstrates PolyOne's commitment to continue investing in its vinyl compound business. There remains a large concern in the chemical business about lower ethylene/polyethylene selling prices. As ethylene is a key raw material for PolyOne, lower prices will actually positively impact the company's gross margins, so long as global demand for plastics remains firm. That said, we have moved PolyOne to a Two rating this week because, as much as we like PolyOne on a fundamental basis, we want to downsize this position to reflect our concerns of slower economic growth in the second half of the year. We will look to sell the 300 shares we bought two weeks ago at $7.29 into the next rally.

Revlon (REV:NYSE, $2.89, 500 shares, 1.77%, Inflection Point): Headlines this week were dominated by Chairman Ronald Perelman's ongoing legal battle with Morgan Stanley MWD. A Florida jury granted Perelman $1.45 billion in total damages, upholding the accusation he was defrauded by the investment bank during the 1998 sale of Coleman Co. We are maintaining our Two rating this week. Despite our enthusiasm regarding the cosmetics company's efforts to turn its operations around -- gaining shelf space and market share -- we don't want to make any additional purchases until the company completes a planned secondary stock offering within the next year. We will update you readers when Revlon improves its liquidity and the stock sale is complete.

Tenet Healthcare (THC:NYSE, $12.50, 200 shares, 3.07%, Inflection Point): Tenet operates 69 hospitals in the U.S. The stock benefited earlier in the week from a bullish story in the most recent issue of Barron's. The piece listed a handful of catalysts for the stock, including the potential asset sales of its hospitals. Natexis Bleichroeder technical analyst John Roque also believes Tenet's chart looks strong, and that the shares could reach $14. That said, we are maintaining our Two rating as fundamental concerns remain about the company's earnings quality. As such, we will look to close this position on a move over $13 a share.

Tut Systems (TUTS:Nasdaq, $2.75, 1,200 shares, 4.05%, Stealth Stock): Tut, a video-processing play, announced on Tuesday that its planned acquisition of CoSine (COSN) fell through this week, after CoSine decided to walk away. Tut is investigating any legal action it may have against CoSine, and while this news temporarily knocked Tut's stock down, we believe the company can recover. The deal was an important strategic steppingstone for Tut, as it would have shored up the company's balance sheet. Following a talk with Tut CEO Sal D'Auria, however, we believe the company will have no problem finding investors to infuse fresh capital into it. D'Auria also said that the pipeline for interactive television deployments remains robust. Unfortunately, market sentiment will likely remain negative until Tut can land a big telco-TV contract, so we won't look to add to our position at current levels. As always, we will update you readers before taking any action in the model portfolio.

World Air (WLDA:Nasdaq, $8.55, 300 shares, 3.15%, Stealth Stock): World Air leases its 16-plane fleet for private charters and commercial cargo flights to customers including the U.S. Air Force. We recommended that readers book profits on Tuesday's 7% rally, as the shares have now rallied more than 40% in the three weeks following the company's announcement that it was acquiring North American Air. We remain upbeat on World Air's long-term outlook, as the company is a great alternative in the troubled airline space for investors looking for a company with little exposure to higher fuel costs and a profitable business model. We will look to add to our stake on a pullback below $7.50 a share.

David Peltier and William Gabrielski, writers ofTheStreet.com Stocks Under $10, are research associatesat TheStreet.com.

Mr. Peltier is a contributor to TheStreet.com Dividend Stock Advisor and maintains the model portfolio for that product.

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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 editorial employees of TheStreet.com, Mr. Peltier and Mr. Gabrielski are restricted from owning individual securities other than stock or options in TheStreet.com, Inc.

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