Breakout Stocks Weekly Summary

On Thursday, insurance giant AIG (AIG:NYSE) reported a much larger-than-expected fourth-quarter loss due to deterioration in its investment portfolio, a disclosure that kept financial stocks from gaining any traction. Also, perennial underachiever Dell (DELL:Nasdaq) disappointed investors with its fourth-quarter numbers after Thursday's close, adding some negativity to the tech camp. And on Friday, the Chicago PMI reading came in at a much lower- than-expected 44.5. This is a sharp decline from last month's reading and indicates weak manufacturing activity in the Midwest.

In addition, the Michigan Consumer Sentiment Index took a dive from last month as consumer negativity continues to pile up in reaction to the slowing economy. Personal income numbers were also weaker than expected, which could be a negative forward indicator for retail spending.

On the positive side this week, photo company Getty Images (GYI:NYSE) and video-game software maker Take-Two Interactive (TTWO:Nasdaq) both received takeover bids. And in the retail space, Gap (GPS:NYSE) announced that it would slow its pace of store expansion, a step we hope to see more retailers take.

The market trend continues to be down, and thus we're going to remain on our conservative path with our large cash position in the model portfolio. Many stocks appear to be quite undervalued and sentiment is extremely negative, but we see no reason to get aggressive right now. However, we are seeing many stocks that were previously above our valuation thresholds come down to reasonable levels, and we'll put money to work in those situations as we see fit.

Now, let's take a quick look at the action in the model portfolio this week:

-- Early Monday morning, Perfect World (PWRD:Nasdaq) delivered blockbuster fourth-quarter numbers and first- quarter guidance. We continue to view Perfect World as the absolute best video-game stock to own right now, and we anticipate upside to above $40 a share this year.

-- On Tuesday, Tessera Technologies (TSRA:Nasdaq) took a beating as the company's legal action with the International Trade Commission was delayed for the re- examination of some Tessera patents. We continue to stay on the sidelines with our Two rating on Tessera, and we'll consider a bullish stance once we see clarity on the company's legal front.

-- Also on Tuesday, we profiled Data Domain (DDUP:Nasdaq), a storage company that we believe may be a good candidate for the model portfolio. Should the stock pull back, we'll look to initiate a position in it.

-- On Wednesday, we added 100 shares to our position in Akamai (AKAM:Nasdaq) as we view the stock as dramatically undervalued. On Friday, the company announced that it had prevailed over competitor Limelight Networks (LLNW:Nasdaq) in a patent case and will receive $45 million in damages.

-- On Wednesday evening, Central European Distribution Corp. (CEDC:Nasdaq) reported excellent fourth-quarter results. The company also announced a significantly accretive action on Tuesday, which plays right into our thesis that the company will continue to expand its footprint in Russia via various deals. Central European remains rated a One, and we'll look to build up this position.

As always, we encourage readers to contact us with their questions and/or concerns, but in the meantime, enjoy the weekend!

Now, let's look at the model portfolio in further detail. As a reminder, we divide the stock portion of the summary into Ones, which are stocks that we would buy at their current quotes, and Twos, which are stocks that should not be bought at their current levels.

ONES

Akamai Technologies (AKAM:Nasdaq, $35.16, 400 shares, 5.4% of the model portfolio): Akamai is the world's leading provider of Internet content delivery services. We added 100 shares to our Akamai position on Wednesday. We believe this is a great time to own shares of Akamai, as the stock is essentially trading at just 19 times full-year earnings despite a full-year earnings growth outlook of more than 25%. In addition, the company's strong relationships with top Internet retailers and Web-based software applications providers gives it a significant leg up on its main competitor Limelight Networks (LLNW:Nasdaq), which is much more dependent on the less-profitable media space. Also, the company has a cash-rich balance sheet, and has displayed great skill in keeping its operating costs low and its operating margins on the rise.

American Apparel (APP:Amex, $12.18, 900 shares, 4.2%): American Apparel is a high-growth apparel retailer operating 175 stores in 13 countries. We remain quite positive on American Apparel despite the headwinds facing the consumer, as we believe the company is well positioned to generate outstanding earnings growth in the coming years. By focusing on young, urban consumers who usually don't own automobiles and/or homes, American Apparel's customer base isn't being hit as hard by high gasoline prices and problematic mortgages as the average consumer.

Central European Distribution Corp. (CEDC:Nasdaq, $58.18, 150 shares, 3.4%): The company produces, distributes and imports alcoholic beverages, mostly in Poland. On Wednesday, CEDC reported excellent fourth-quarter results. While earnings came in 2 cents shy of expectations, they were up 37% year over year in the quarter. Sales rose 32% in the quarter to $393 million, and operating margins expanded a full point year over year to 11.4%. Plus, on Tuesday the company announced an investment in Russian liquor and wine company Whitehall Group, which should close in the next two to four months and could add 35 cents to 45 cents a share in annual earnings. We remain very bullish on CEDC.

Dolby Laboratories (DLB:NYSE, $44.38, 275 shares, 4.7%): Dolby is the global leader in audio technologies used in consumer electronics and professional content productions, such as films and TV programs. We remain positive on Dolby given the company's leverage to fast-growing segments of consumer electronics such as HDTVs and notebook PCs. In addition, this week Deutsche Bank issued a report saying that next-generation Blu-ray DVD players are selling out at various retailers, indicating improving demand. We have not been bullish on the likelihood of Blu-ray winning the format war, but its success would be quite positive for Dolby because Dolby technology is included in all Blu-ray players.

Energy Conversion Devices (ENER:Nasdaq, $26.57, 525 shares, 5.4%): The company, a conglomerate in the alternative- energy space, has segments that work in solar power and advanced battery technologies and applications to develop improved flash memory. We remain bullish on Energy Conversion Devices as we believe the company's improving operational execution and high oil prices make it an attractive investment. In addition, Energy Conversion has seen a remarkable turnaround in solar sales, as 80% of its fiscal 2009 sales pipeline is full. The company's stake in memory company Ovonyx could turn out to be enormously valuable if its PRAM memory technology was to take off. While we still consider it to be a very speculative name, we remain bullish on Energy Conversion.

Focus Media (FMCN:Nasdaq ADR, $50.37, 425 shares, 8.2%): The company operates a network of advertising platforms in China. We are happy with the improved performance of Focus Media's stock as of late, and we see continued upside in the stock. The Chinese economy remains strong, and Focus Media is the best play on that growth given its leverage to the booming Chinese advertising market. We also believe that the upcoming summer Olympics in Beijing could be a catalyst for further acceleration in advertising demand. Plus, Focus Media is considering spinoffs of its wireless and Internet advertising units, which we believe could add $10 or more to Focus Media's share price.

GameStop (GME:NYSE, $42.36, 325 shares, 5.3%): The company is one of the world's largest retailers of video-game hardware and software, with more than 5,000 stores across the globe. We remain positive on GameStop because we believe the video-game industry is set to have an outstanding year, based on our analysis of the industry's current product lineup. Getting into the specifics, we believe industry excitement should pick up considerably over the next few months due to the release of blockbuster software titles such as Nintendo's "Super Smash Bros. Brawl" and Take-Two Interactive's (TTWO:Nasdaq) "Grand Theft Auto IV." We still view GameStop shares as undervalued and believe they could go higher from here.

GFI Group (GFIG:Nasdaq, $76.55, 275 shares, 8.1%): This company provides brokerage services to investment banks and hedge funds, with a focus on derivatives, including credit, financial and commodity products. On Thursday, futures brokerage firm MF Global (MF:NYSE), which operates a similar business to GFI, announced that due to unauthorized trading activity, it would take a writedown of $142 million. Readers should note that GFI does not employ traders who make directional bets on the market. Rather, it simply brokers trades for financial institutions, which allows it to benefit from increased derivatives trading volumes without actually taking on risk in the market itself. We continue to view GFI as very undervalued and believe the stock is a buy here.

Guess? (GES:NYSE, $41.24, 400 shares, 6.3%): Guess? is an international retailer and wholesaler of apparel aimed at young men and women. We believe Guess? is set to outperform the market and its competitors in 2008 as the stock remains seriously undervalued. Unlike the vast majority of its apparel rivals, Guess? is seeing tremendous sales momentum domestically, which we attribute to the company's ability to regularly churn out hit products. Guess? is also generating impressive growth internationally, even in the slowing Western Europe market. Plus, emerging markets like China are performing well for Guess?, and its licensing and wholesaling businesses continue to shine. We believe the stock can hit $50 or higher in 2008.

Netgear (NTGR:Nasdaq, $21.82, 650 shares, 5.5%): The company develops and markets networking products aimed at consumers and small businesses. We remain quite positive on Netgear for the long term. The company is seeing its shipping costs swell due to high oil prices, but products remain in high demand from consumers and small businesses, which aren't pulling back on spending like large enterprises. In addition, we believe Netgear's extremely cheap valuation and $205 million cash balance could make it an attractive takeover target for a larger hardware company such as Cisco (CSCO:Nasdaq) or Motorola (MOT:NYSE). Cisco would be an especially good fit, as it would give Cisco a dominant position in consumer networking products.

Perfect World (PWRD:Nasdaq, $27.03, 675 shares, 7.0%): Perfect World is a leading Chinese video-game developer. We believe Perfect World is the best video-game stock to own currently. Perfect World has delivered two absolutely outstanding quarterly results in a row, has sky-high 53% operating margins and generates enormous free cash flow. In addition, the company has a catalyst ahead in the form of upcoming title "Chi Bi," which is based on the biggest film in Chinese history. At the same time, the stock trades at an enormous discount to U.S.-based video-game companies that are growing at much slower rates. We believe Perfect World can hit $40 or higher this year.

Silicon Motion Technology (SIMO:Nasdaq, $14.87, 525 shares, 3.0%): Silicon Motion is a semiconductor company that specializes in microcontrollers used in flash memory. We remain positive on Silicon Motion because we believe the flash memory market will grow substantially in the coming years, as prices continue to fall and new applications enter the market. In addition, consumer electronics manufacturers are rapidly increasing the amount of flash memory they include in products such as mobile phones and MP3 players. In addition, the stock is extremely cheap at about eight times expected full-year earnings, which we believe discounts a worst-case scenario for the company.

TWOS

Tessera Technologies (TSRA:Nasdaq, $23.56, 200 shares, 1.8%): The company specializes in licensing miniaturization technologies to major semiconductor manufacturers. Shares of Tessera got killed Tuesday after the judge in its International Trade Commission (ITC) case issued a stay in the company's action against Qualcomm (QCOM:Nasdaq), Motorola (MOT:NYSE) and several other companies. This delay in litigation is keeping us cautious on the stock, and we'll look for some progress on the legal front before considering a more bullish outlook on the stock.

Zoltek (ZOLT:Nasdaq, $22.88, 350 shares, 3.1%): The company produces carbon fiber, a strong composite material used to reinforce blades for wind turbines and airplane brake pads. Sky-high oil prices are a positive for alternative energy stocks, but we remain cautious on Zoltek for now. Zoltek's first-quarter results reported Feb. 11 were pretty awful, and we don't see any reason to get excited about the stock now. We'll look for shares to decline into the low $20s before getting bullish again.

Regards, Michael Comeau & the TSC Breakout Stocks Team

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