Breakout Stocks Weekly Summary

Signs of stability among retailers, along with strength in alternative energy stocks, were among the key highlights for growth-oriented investors this week. Although the broader indices finished the week lower, the Russell 2000 index fared better than its large-cap counterparts, signaling an improving environment for small-caps.

Looking briefly at news in the large-cap arena, Wal-Mart (WMT:NYSE) posted better-than-expected April same-store sales of 3.2%, while Costco's (COST:Nasdaq) 8% increase was not enough to keep its shares up during the latter part of the week. On Tuesday, Cisco (CSCO:Nasdaq) beat the Thomson Reuters consensus estimate by 2 cents a share. Not surprisingly, international results offered a better catalyst for Cisco's investors, as the single-digit rate of revenue growth in the U.S. offered little for the market to get excited about. We believe that international markets will continue to offer a more attractive growth story for investors on a multiyear timescale, and we plan to devote a good portion of the model portfolio to plays that include a significant international component.

In our first week of managing and improving the Breakout Stocks service, readers saw some introductory changes as we closed our position in Zoltek (ZOLT:Nasdaq) a day after the announcement that the company found two unauthorized payments at its subsidiaries and that CFO Kevin Schott was no longer with the company. Although the news caused a massive unloading of the company's stock, we were able to close out at a much higher price by waiting a day for the carnage to abate.

We also saw a massive move higher in our Energy Conversion Devices (ENER:Nasdaq) position, after the company posted quarterly results Thursday that blew away expectations. Although a significant reason for the rally was company- specific improvements, we believe that many names in the alternative energy space will offer major upside potential for at least the next year. Outside of solar energy, we are also looking at companies poised to benefit from increasing construction and usage of wind power and advanced battery technologies. Thankfully, the energy space is large enough to find a number of different plays that should benefit from the ongoing theme of rising energy demand coupled with limited supply growth.

Since we have taken over the reigns of Breakout Stocks, readers should note that some of the One-rated stocks in the model portfolio have been moved to a Two rating in this week's summary. We have a less bullish view on certain stocks in the model portfolio, and these names are likely to be the first ones that we remove as we initiate new positions in the coming weeks and months. Specifically, GFI Group (GFIG:Nasdaq), Netgear (NTGR:Nasdaq) and Silicon Motion (SIMO:Nasdaq) are not attractive for purchase at the moment, based on factors that we've outlined in the stock portion of the summary below.

One of the improvements in Breakout Stocks that readers will benefit from is a larger number of investing ideas, along with expanded coverage of sectors that offer big investment opportunities. This week, we're providing readers with our initial Watch List. This feature will be a regular part of the Weekly Summary, and we plan to provide occasional added commentary on some of the names on the list, mainly looking at a specific thesis that we see developing for a particular name as well as our reasoning for why we haven't added the stock to our model portfolio at the current price.

What follows is an initial list of names that have caught our eye recently during the research process. We'll be looking at each of these more closely, but we're offering these names early in the process so that subscribers can get a head start:

Abaxis (ABAX:Nasdaq), Albany Molecular Research (AMRI:Nasdaq), American Superconductor (AMSC:Nasdaq), China Natural Resources (CHNR:Nasdaq), eResearch Technologies (ERES:Nasdaq), Graftech International (GTI:NYSE) and Layne Christenson (LAYN:Nasdaq).

Once again, we encourage readers to email us with any questions, concerns or suggestions about the Breakout Stocks service. We're very excited about initiating new positions and looking into different corners of the market over the next few weeks.

Now let's look at the model portfolio. As a reminder, Ones are stocks that we would buy at their current quotes, and Twos are stocks that should not be purchased at their current share prices.

ONES

Akamai Technologies (AKAM:Nasdaq, $37.25, 400 shares, 5.69% of the model portfolio): The company is the world's leading provider of Internet content delivery services. Shares of Akamai outperformed the broader indices this week, on the heels of last week's solid quarterly earnings report. We believe this name offers additional upside during 2008, as recent results show the company continues to add customers - - 27 in the recently reported first quarter and better than most analysts were expecting. Akamai has already established itself as a leader in online infrastructure. We see further upside this year, based on shares earning a higher multiple and the company's leverage to a healthy online commerce environment. We believe online commerce could prove much more resilient than the broader U.S. economy.

American Apparel (APP:Amex, $8.50, 1,250 shares, 4.06%): American Apparel is a high-growth apparel retailer operating more than 187 stores in 15 countries. On Wednesday after the close, the company announced April same- store sales numbers that were up 27% over the prior year. Shares pushed higher briefly Thursday morning following the news but finished slightly lower on the day. We view the results as positive but remain focused on the stock's long- term potential, as the company is in the early stages of becoming a major U.S. retailer. We see near-term upside as recent negativity -- summarized in a Wall Street Journal article less than a month ago -- subsides. In addition, it's likely that American Apparel will benefit alongside shares of other retailers as valuations in the sector recover ahead of any visible improvement in fundamentals.

Central European Distribution Corp. (CEDC:Nasdaq, $63.80, 225 shares, 5.48%): The company produces, distributes and imports alcoholic beverages, mostly in Poland. Central European Distribution offers unique exposure to strength in both the broad European economy and the currencies of its countries. We see shares as undervalued relative to the company's strength in the Polish market and opportunities to drive revenue growth in other countries -- including those outside of Europe, such as Japan and the U.S. The company is executing well on its expansion plans, and we believe investors will benefit as the stock gains more attention from the investment community, especially Wall Street analysts.

Dolby Laboratories (DLB:NYSE, $44.65, 275 shares, 4.69%): Dolby is the global leader in audio technologies used in consumer electronics and professional content productions, such as films and TV programs. Last week's strong quarterly results showed that the company is making progress in virtually all segments, especially its PC-related business. The results suggest that Dolby is more resilient in the face of weakness in U.S. consumer spending, which was a major concern for analysts and investors this year. We remain bullish on the company's prospects for improving margins (due to growth in licensing revenue). In our view, Dolby is poised to expand on its dominant position in digital cinema and audio, with additional upside as new opportunities present themselves in other areas of consumer electronics.

Focus Media (FMCN:Nasdaq ADR, $39.03, 425 shares, 6.33%): The company operates a network of advertising platforms in China. On Tuesday, Focus Media filed its 20-F (the international equivalent of a detailed annual 10-K report) annual report, which had been anticipated by investors looking for additional information on the company's operations. In fact, the filing offered little new information for investors to consider, which is a generally positive sign based on the skepticism that currently surrounds the stock. We believe this negativity creates the potential for gains during the second half of this year, as Focus Media moves past the snafu in its mobile business and focuses on its other, much larger segments, including digital advertising in public spaces and online. Our view is that the near-term story has hit a bump in the road but the long-term story remains extremely attractive for risk- tolerant investors.

GameStop (GME:NYSE, $51.23, 325 shares, 6.36%): 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. On Tuesday, Barron's published a negative article on GameStop, saying that the company has extremely high expectations to meet and that shares may be poised for a fall if investors are disappointed with future sales results. The story included quotes from an analyst at Wedbush Morgan (who has a hold rating on the stock) and highlighted increasing competition at retailers such as Blockbuster (BBI:NYSE) and Circuit City (CC:NYSE). The article was not entirely baseless in so far as it's true that GameStop has high expectations from investors, but we view the company as a developing major force in the retail sector. GameStop's core customer base of gamers continues to expand, and new products like "Wii Fit" will only help solidify the company's position to benefit from the next round of top games. Expectations for sales of "Grand Theft Auto IV," released just last week, are understandably high because the game is certain to be the biggest blockbuster of the year. We believe the concerns raised in the Barron's article are already reflected in the stock, which is trading about 20% off its 52-week high.

Guess? (GES:NYSE, $40.44, 400 shares, 6.17%): Guess? is an international retailer and wholesaler of apparel aimed at young men and women. Shares traded higher this week as sales data for other retailers showed that recent negative industry trends appear to be stabilizing. Guess? remains an attractive play in the apparel space because of its diversified business model and strong momentum in international markets. With a solid balance sheet and better growth profile than the vast majority of apparel names, Guess? shares should move higher as concerns over the economy become less of a focus for investors. This name also has the potential to benefit from increased coverage from Wall Street analysts.

Perfect World (PWRD:Nasdaq, $30.88, 675 shares, 7.96%): The company is a leading Chinese video-game developer. On Tuesday morning, analysts at Brean Murray published a report offering positive commentary on select Chinese video- game companies, including Perfect World. In its morning research note, Brean Murray pointed to recent strong results at Sohu (SOHU:Nasdaq) as a bullish indicator for other names in the gaming sector. These comments were directly aimed at companies that offer online role-playing games (RPGs), which is Perfect World's strong suit. We view the stock as a highly speculative but potentially huge winner for investors based on increased attention from Wall Street and the potential for any of its games ("Zhuxian," "Perfect World 2," "Legend of Martial Arts" and others) to become blockbusters. As with all of our more speculative picks, investors should expect above-average volatility in this name.

TWOS

Energy Conversion Devices (ENER:Nasdaq, $47.74, 375 shares, 6.83%): The company is a conglomerate in the alternative- energy space with segments that work in solar power and advanced battery technologies as well as applications to develop improved flash memory. Energy Conversion Devices was our big winner for the week, as shares rallied sharply after the company surprised the Street by posting quarterly earnings that were 31 cents better than consensus estimates. Also, on Friday, we sold 150 shares in order to lock in some profits, which we believe is a prudent move after such a strong advance in a speculative name. For the fiscal third quarter, the company earned 25 cents a share on revenue of $70 million. These numbers were well ahead of consensus expectations for a 6-cent loss on revenue of $66.7 million. More importantly, the company became profitable a full quarter ahead of schedule, thanks to vastly improved productivity at facilities in Michigan and Mexico. The ramping of production lines resulted in a second straight quarter of strong gross margins, which were 30.7% for the quarter, up from a solid 19.2% in the previous quarter. We moved our rating on Energy Conversion Devices to a Two on Wednesday based on our view that we would not be buying the stock immediately ahead of the quarter, following the strong run-up since February. Management has done an amazing job regaining investor confidence in a short time, and we want to be able to add to our position if the stock pulls back over the next few months.

GFI Group (GFIG:Nasdaq, $11.90, 1,250 shares, 5.68%): This company provides brokerage services to investment banks and hedge funds, with a focus on derivatives, including credit, financial and commodity products. A string of negative news in recent months has pushed shares down to value territory, prompting us to move this name to a Two earlier today. The recent defection of a number of high-level employees creates a number of questions about the company's ability to excel in an increasingly competitive environment. Although we believe it's likely that shares are oversold, based on the intense negative sentiment toward the company, we don't plan on adding to our position. Rather, we are likely to sell on a rebound in the share price and replace this name with one that offers bigger potential upside during 2008.

Netgear (NTGR:Nasdaq, $17.42, 650 shares, 4.32%): The company develops and markets networking products aimed at consumers and small businesses. Although shares of Netgear are trading near their 52-week low, we're moving our rating on the stock to a Two this week. The reasoning behind this move is our belief that the company needs to show some ability to meet existing expectations. First-quarter results announced last month included some positive information, such as the addition of Wal-Mart (WMT:NYSE) as a customer, but more serious fundamental issues remain. Most importantly, Netgear's results are under pressure due to price reductions at Linksys, a division of Cisco (CSCO:Nasdaq). While we don't intend on selling out of our position immediately, we plan on replacing this name with a stock that offers greater upside potential for subscribers.

Silicon Motion Technology (SIMO:Nasdaq, $17.07, 675 shares, 4.40%): Silicon Motion is a semiconductor company specializing in microcontrollers used in flash memory cards. Last week's better-than-expected earnings results offered a bullish case for the company's ability to benefit from lower flash memory prices, as shipments to customers -- including Samsung -- were up nicely for the quarter. We view the stock as offering potential upside as sales of ultra-mobile PCs continue to grow, and design wins at Hewlett-Packard (HPQ:NYSE) and Dell (DELL:Nasdaq) bode well for Silicon Motion's future. Silicon Motion has been pushed to a Two rating this week's due to the fact that we're not interested in adding to this position, as we acknowledge there is risk from a potential increase in competition in the controller market. For now, we plan to holding on to this name as the bullish thesis develops, rather than increasing our position.

Tessera Technologies (TSRA:Nasdaq, $17.90, 200 shares, 1.37%): The company specializes in licensing miniaturization technologies to major semiconductor manufacturers. Last week's market reaction to Tessera's relatively weak quarterly earnings shows that expectations have come down to relatively modest levels. Legal expenses continue to be a focus for investors based on the company's ongoing patent litigation. Tessera's core wireless and memory units remain strong, but we would look to exit this position on strength or as we introduce new names with bigger upside into the portfolio in the next few weeks.

Regards,

Larsen Kusick & the TSC Breakout Stocks Team

Send email to breakoutstocks@thestreet.com