Stocks Under $10 Weekly Summary

Higher oil prices and weakness in two Dow components, AIG (AIG) and General Motors (GM) , were honey for the bears this week. The bad news helped them retain their first-quarter 2005 lead in the S&P 500 and Nasdaq, while the Dow is flat for the year. While there were some positive events this week, namely strong earnings results from the large-cap brokers like Goldman Sachs (GS) and Lehman Brothers LEH, seeing two Dow titans nosedive shook investors' confidence. This could make it more difficult for the market to find any type of tradeable bottom in the near term.

For the week, the Dow lost 1.3%; the Nasdaq dropped 1.7%; and the S&P 500 finished 0.9% lower.

We used this week's weakness to initiate positions in two stocks, Geron (GERN) and Zi ZICA. On Monday, we added 700 shares of the stem-cell play, Geron, to the model portfolio. This marks the third time we have owned this stock, which has given us some nice gains in the past three months. With shares now trading under $7, we believe this position could garner a double-digit return on any good news from studies leading to potential human trials for stem-cell therapies in currently untreatable health conditions.

Our other addition, Zi, makes predictive text software that is embedded in cell phones. It is now trading below $5 a share, down some 42% from its 52-week high of $8 a share. At this price, the stock looks compelling, and we added 800 shares to the model portfolio on Wednesday. Like Geron, we have had a profitable experience owning Zi in the past. Although its shares sold off this week in reaction to disappointing fourth-quarter earnings results, we believe the selling was overdone as much of the sales and earnings shortfall is one-time in nature. Zi is continuing to introduce new products that should drive upside to the stock for the remainder of the year.

We also made some sales this week that we believe will help protect the model portfolio from the drumming that high-multiple and auto-related stocks have been taking of late. For instance, we sold half of our position in Imax (IMAX) Wednesday for a small loss; over the next two trading days, the stock lost another 6.25%. Then on Thursday, we trimmed the size of our largest holding, Quantum (QTWW) , to 1,000 shares from 1,700 shares. By Friday's close the stock had lost an additional 9.2%. This leaves us with 8.31% of the portfolio in cash, and we will look to make some buys in our One-rated stocks next week. We also have 20 positions in the model portfolio, the most we have ever had, and will look to close out some of our Two-rated stocks before adding any more new names.

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 Applied Micro Circuits (AMCC:Nasdaq, $3.23, 2,000 shares, 7.04% of the portfolio, Inflection Point): Applied Micro sells integrated circuits to companies like Cisco (CSCO) for use in network processors. Shares lost another 3.2% this week, and are now down 23% year to date as investors seem be avoiding low-priced semiconductor stocks. But the company looks well-positioned to turn in solid earnings results for the remainder of the year. Applied Micro has made a handful of acquisitions over the past few years that have increased its total addressable market to $10 billion from $3 billion. With demand for storage products strong and the company cutting back on its expenses, Applied Micro should turn in break-even results, as forecast by Wall Street, for the March quarter. On Thursday, Pacific Growth upgraded the stock to overweight from equalweight, saying it sees the pieces slowly falling into place for the company, and channel checks indicating solid bookings for the March quarter. We would add to our stake under $3 a share.

Brocade (BRCD:Nasdaq, $5.66, 1,200 shares, 7.41%, Inflection Point): The network-storage company turned in a solid week, gaining about 1%. As we said about a week ago, we believe shares became oversold after news the SEC had launched an informal investigation into Brocade's accounting practices. On Tuesday, a Merrill Lynch research note on the enterprise storage segment suggested that Cisco (CSCO) may be looking for an acquisition to increase its share of the lower-end fabric switch market where Brocade has a strong presence. We own Brocade for its relative valuation discount to its peers and steady revenue growth, but wouldn't be surprised if Cisco has Brocade in its sights. The stock remains attractively priced at 16 times estimated earnings, and we would add to the position here if we didn't already have a 1,200-share position. CGI Holdings (THK:Amex, $4.85, 500 shares, 2.64%, Stealth Stock): CGI helps companies choose the right key words for their corporate Web sites in order to achieve better positioning on Internet search engines. The company continued its acquisition spree this week, announcing it had bought privately held affiliated marketing company KowaBunga! for an undisclosed amount. Although this company is using acquisitions to fuel growth, we are comfortable with that strategy. CEO Gerard Jacobs doesn't make dilutive acquisitions and never pays for more than half of a deal in cash to ensure that the acquired company's management takes an active role in integration and future growth. Should management break from this tactic we would consider stepping away from CGI, but for now we believe the company is positioned to benefit from increased use of the Internet over the next 12 months. We will look to add to our stake under $4.50 a share.

Ciena (CIEN:Nasdaq, $1.85, 1,500 shares, 3.03%, Inflection Point): We sold 1,000 shares of the telecommunications-equipment play Wednesday to raise cash for a new stock idea. Although Ciena still looks undervalued relative to its peers, the stock failed to mount a meaningful rally Monday when Smith Barney upgraded its rating to neutral from sell, and we believe this could be a harbinger of lower prices in the near term. Ciena, which is in the midst of a turnaround, has acquired four companies over the past two years, which should help it stem mounting operating losses over the next 12 months by giving it technology to participate in the buildup of telco-TV and voice-over-Internet protocol (VoIP) by the regional Bell and cable companies. We are still holding a 1,500-share position and believe that a speculative position at the stock's current price could pay off for those with a 12-month time horizon.

Geron (GERN:Nasdaq, $6.58, 700 shares, 5.02%, Game Breaker): We initiated a 700-share position in this stem-cell Stealth Stock on Monday. This is our third time taking a position in Geron, and we believe that at current prices, shares are poised to react positively to good news. Plus, several factors put Geron in a strong position: The biotech is based in California, which last year approved $300 million in funding over the next 10 years for stem-cell research; it holds the industry's largest patent portfolio; and the company has a solid balance sheet to fund operations without tapping the capital markets and diluting current shareholders. In December when the market was in an uptrend, Geron's stock was often making 10% moves higher every time stem cells were mentioned in the news, but those momentum chasers seem to have left this stock -- and the stem-cell group for that matter. While it may seem to be a negative that investors have lost interest in Geron, we view it as a positive, especially given the potential for good news surrounding stem-cell companies. We believe the stock's current price is a good entry point.

Imax (IMAX:Nasdaq, $9.08, 300 shares, 2.97%, Game Breaker): Imax has a patented video format that enhances the movie-going experience by providing greater picture and sound quality. On Wednesday, we sold 300 shares, or half of our position, for a small loss because the stock has been unresponsive to good news and, in fact, has traded lower on heavy volume on days without news. That said, we still have a bullish 12-month thesis on Imax. The company has come a long way during the past two years, creating a digital remastering technology (DMR) that allows it to turn potential blockbuster hits into Imax features by converting 35mm film into its patented 70mm/15 format. DMR increases theaters' revenue per screen by increasing admission fees. For example, the Imax version of "Polar Express" generated about 22% of the film's box office receipts despite being shown on only 2.5% of total screens. And Imax has a menu full of potential hits right now, including recently released "Robots," which led all movies in its first week. In addition, there is still an 18% short position in Imax, and we believe the company has the potential to deliver above-forecast sales and earnings in 2005 and force a wave of short-covering.

Maxtor (MXO:NYSE, $5.46, 1,000 shares, 5.95%, Inflection Point): Maxtor designs and manufactures hard-disk drives used for storage in personal computers and consumer electronics. It was a quiet week for the disk-drive group with nothing newsworthy to report. Maxtor is in the process of a turnaround to lower costs and end the company's three-quarter streak of losing money. As part of its strategy, Maxtor is moving some production facilities from Singapore to China and trimming its headcount by 200 employees. Although the company raised its fiscal first-quarter sales guidance to a range of $975 million to $1 billion from prior guidance of $950 million to $980 million, and raised its gross margin expectations, most analysts remain neutral on the company. At current prices, the stock is trading at the low end of its valuation range at just 0.35 times sales, and we expect the stock to trade closer to its historical range of 0.4 to 0.5 times sales once the Street gains confidence in this management team's ability to right the ship. We have a full position, but would be buyers of the stock at today's closing price.

NIC (EGOV:Nasdaq, $4.63, 900 shares, 4.54%, Stealth Stock): NIC designs portals for online processing of transactions from government agencies like the Division of Motor Vehicles (DMV). We sold 300 shares on Monday for a 3% gain when it appeared that overhead resistance was weighing on the stock. The last two times NIC shares broke the $5 barrier to the upside, the stock was greeted with selling pressure that sent it back down to the $4.50 level. Our sale did not reflect any change in our outlook for the company, and we continue to expect NIC to beat its 2005 sales guidance of $59 million, particularly as that figure does not include pending portal agreements with Colorado and South Carolina. Also, margins should get a lift as the company increases its revenue per user in the 16 states where it already has portal agreements in place. We will look to add back the shares we sold under $4.50 a share.

OpenTV (OPTV:Nasdaq, $2.85, 1,300 shares, 4.04%, Stealth Stock): OpenTV develops software for interactive television, including applications for gambling and targeted advertising. The company reported solid fourth-quarter earnings results after the close Wednesday. Revenue for the quarter came in at $24.1 million, helped in part by the recognition of sales that slipped into this quarter from the third quarter, and the company reported a loss of 3 cents a share. The Street was looking for a loss of 5 cents a share on sales of $19.82 million. OpenTV also said in a press release that its products can now be found in more than 50 million cable boxes, up from 44 million last year. The results were encouraging, but like many small companies before it this quarter, OpenTV said it found a weakness in its internal controls and is not yet in compliance with Sarbanes-Oxley. We believe OpenTV will be able to fix its financial controls and continue to post solid results, which will lead to a higher share price. Catalysts from here include new business from cable giant Comcast (CMCSA) , continued strength in international markets, and further development of revenue-generating applications with satellite video provider EchoStar (DISH) . We like the stock at its current price.

RAE Systems (RAE:Amex, $3.95, 1,200 shares, 5.17%, Stealth Stock): RAE makes gas and motion sensors that monitor sporting events and other large venues for security. We added 300 shares to our position this week with the stock trading 33% below our cost basis -- in large part because of the Street's negative reaction to the company's 2005 sales and earnings outlook, which fell short of expectations. In addition, the company announced Thursday that it was delaying the filing of its 10-K annual report because of internal control problems. Although the stock gapped down Friday morning on this news, the delay wasn't really a surprise as the company had already said during its fourth-quarter earnings report in February that it was having problems complying with Sarbanes-Oxley. We believe this concern is priced in at current levels. We believe RAE will ultimately find itself supplying the Department of Homeland Security with sensors to secure the millions of cargo containers that come in and out of U.S. ports every year. RAE has already successfully tested its sensors for efficacy on a trip from California to Hawaii and back. At current levels, we view the stock as a speculative buy and would be adding to our stake if we didn't already have a 5.17% position in the model portfolio.

SunOpta (STKL:Nasdaq, $5.60, 500 shares, 3.05%, Stealth Stock): SunOpta is a leading soy and organic food producer. The company filed its 10-K annual report with the SEC this week, and after reading through it, we continue to believe SunOpta shares present a compelling value. For one, the company made a number of acquisitions in 2004 that should be integrated in 2005. And the organic food market, as evidenced by the performance of Whole Foods WFMI, remains white hot. We have been patiently waiting to add to our stake following the stock's 17% drop after reporting disappointing fourth-quarter earnings results two weeks ago, and will look to add to our stake under $5.50 a share in the coming weeks.

SupportSoft (SPRT:Nasdaq, $5.39, 1,000 shares, 5.88%, Inflection Point): SupportSoft provides automated service software for broadband services and systems management. The stock underperformed this week, losing 10%, despite signing a deal with cable operator Charter Communications (CHTR) for SupportSoft's ServiceVerify software, which enables companies to automatically validate installation of services, diagnose problems and provide recommendations to enhance performance. The market's non-reaction to this announcement is a symptom of the current cautious environment, as investors continue to seek out blue-chip stocks, but we believe SupportSoft's current valuation of 14 times 2005 estimated earnings of 22 cents a share, after backing out the cash, creates a nice risk reward/ratio for investors. We expect more deals of this nature to be signed and view the current price as a buying opportunity for investors with 12-month time horizons.

Tibco Software (TIBX:Nasdaq, $7.76, 500 shares, 4.23%, Game Breaker): Shares of Tibco, which is a leader in integration software, got a lift early in the week when IBM (IBM) announced it was acquiring integration-software company Ascential Software (ASCL) for an 18% premium. Unfortunately, these gains were short-lived and profit-taking on Wednesday knocked 4.4% off Tibco's stock, but shares recovered to close the week 2% higher. We believe Tibco is positioned to rebound further from its disappointing first-quarter guidance issued earlier this month and meet the Street's full-year revenue target of about $460 million, which makes shares attractive here at just 3.6 times sales vs. a sector average of about 4.8 times sales. The company will report fiscal first-quarter earnings next Thursday. With disappointment already baked into the stock's current quote, we believe shares have the potential to trade higher on any positive developments in the company's European business, which was the culprit in the company's recent announcement of a shortfall. We will add to our position under $7 a share.

Tut Systems (TUTS:Nasdaq, $3.10, 1,700 shares, 5.75%, Stealth Stock): Tut is a video-processing play that is positioned to benefit from the rollout of Internet-protocol television (IPTV) by the regional Bell companies. Nothing newsworthy occurred this week for Tut, though the stock did trade meaningfully lower with the market on Wednesday. We expect stocks like Tut -- which are tied to catalysts and trends, not operating performance -- to be volatile, but we believe the company has enough potential deals in the pipeline from the regional Bell companies and cable giants to warrant a speculative bet here. On its fourth-quarter earnings conference call, for instance, Tut stated that requests for proposals from unnamed North American carriers for IPTV deployments had reached $200 million and that the market is now bigger than its initial expectations. We believe the stock should be accumulated at its current price, though we have a 5.75% position and won't be adding more here.

Zi (ZICA:Nasdaq, $4.59, 800 shares, 4%, Stealth Stock): Zi makes predictive text software that is embedded in cell phones and decreases the amount of keystrokes required for tasks like sending text messages and emails via wireless networks. We initiated an 800-share position in the model portfolio Wednesday, following the company's announcement Tuesday of fourth-quarter sales of $3.2 million, and a loss of 4 cents a share. Investors greeted the report -- which came in below forecasts on both the top and bottom line -- with selling pressure that clipped 21% off Zi's market cap.We used the selloff to take a position at a price we believe provides an attractive risk/reward scenario for investors. It appears that the sales and earnings miss are one-time in nature and resulted from some technology problems that occurred in late 2003, but didn't show up on the income statement until this quarter because of the normal lag between when the company makes a sale and whenit is recorded as revenue. Catalysts from here include contracts with new phone manufacturers and successful field tests for its recently launched Qix software, which acts as a search engine on cell phones. For you readers who haven't yet taken a position, we view the current quote as an attractive entry point.

TWOS

Allscripts (MDRX:Nasdaq, $14.47, 200 shares, 3.16%, 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). On Wednesday, the company announced that Floyd, a leading health care system in northwest Georgia, will implement its TouchWorks software to link patient information to a readily accessible electronic network. Deals like this are getting more common for Allscripts, which has already announced a number of new contracts this year, as more physician networks look to implement information technology into their practices. We expect Allscripts shares to continue trading higher as the good news rolls in, but we rate the stock a Two because it is already up 35% year to date. We would only look to add to our stake on a 10% pullback from Friday's closing price.

Quantum Fuel Systems (QTWW:Nasdaq, $4.89, 1,000 shares, 5.33%, Game Breaker): On Thursday, we sold 700 shares of Quantum, a leader in the alternative fuel cell industry, because of our growing concerns about its near-term prospects. With General Motors' (GM) warning on Wednesday that it will miss its prior operating cash flow expectations for 2005, high steel prices cutting into profit margins, and higher gas prices curbing demand for trucks, we believe the near-term outlook for Quantum is now tainted with more risk than we would like to see in our largest holding. Quantum is less-exposed to a slowdown than auto-parts companies like Delphi DPH because of its focus on alternative-energy cars and its relationship with Toyota (TM:NYSE ADR) and the U.S. government, but we believe a more cautious stance is now warranted. We are moving Quantum to a Two rating.

Restoration Hardware (RSTO:Nasdaq, $5.45, 1,000 shares, 5.94%, Inflection Point): Restoration sells upscale furniture and home fixtures through its retail stores, catalog and Web site. We expected the company to report fourth-quarter earnings this week, but couldn't get the retailer on the phone to confirm the date and the results never hit the wires. We will update you readers when the company confirms its earnings release date. We expect Restoration to benefit from the strength in the high-end retail space that has been seen in companies like Coach (COH) , which have reported solid results. While we expect shares to move higher in 2005, we won't be increasing our stake until we see fourth-quarter earnings results.

Revlon (REV:NYSE, $2.93, 1,400 shares, 4.47%, Inflection Point): Shares of the cosmetic maker, which is in the middle of a long and difficult turnaround, gained 4.4% this week. CEO Jack Stahl inherited a sinking ship in 2002, but he has made the right moves and Revlon turned in its first profitable quarter in six years last week. Stahl has refinanced the company's heavy debt load, pushing maturities out until 2010 and freeing up cash to invest in the brand. In addition, Stahl has been tasked with repairing damaged relationships with key vendors like Wal-Mart that former management had little regard for, to the detriment of key shelf space. Recent market-share data, as reported by Deutsche Bank on March 4, reveals the company is also gaining ground on this front. Despite Stahl's progress, however, the company still has a significantly overleveraged balance sheet, and we expect Revlon to raise cash over the next year with a large equity sale. As such, we are moving Revlon back to a Two rating this week, and we will look to cut our 1,400-share position in half at over $3 a share.

Wheaton River Minerals (WHT:Amex, $3.78, 500 shares, 2.06%, Inflection Point): It was a flat week for this gold play despite a modest pullback in the underlying commodity. Wheaton is in the process of being acquired by Goldcorp (GG) in a stock deal that will create the industry's lowest-cost producer of at least 1 million ounces. In addition, the deal will take some of the pressure and focus off of Goldcorp's Red Lake Mine -- which has had some expansion setbacks of late because of difficulty getting deep enough into the ground -- as Wheaton brings a handful of successful mining sites to the table. We believe the deal is good for shareholders in the long run, and expect the combined company will be able to generate enough cash flow to do future accretive acquisitions. We have a 20% gain in Wheaton, but believe shares have further room to run and plan to hold our 2% stake for higher prices.

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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