Breakout Stocks Weekly Summary

Market sentiment feels much worse than the manner in which the market actually fared this week. For the most part, the economic news we have seen has been "OK" at best. After the market rally from the March lows, however, we know that "OK" can't sustain the market's momentum.

Courtesy of the Mortgage Bankers Association, we learned on Thursday that high unemployment led to the rise in mortgage delinquencies. The reality is that these numbers are a natural result of the nationwide 10.2% unemployment rate, and not a surprise. The other, more significant reality is that investors are skittish -- and skittish investors make for increased volatility, even though we know the road to recovery will not be a straight line higher.

On Thursday, a Bank of America/Merrill Lynch analyst downgraded the semiconductor industry, and technology stocks felt the wrath of the souring market sentiment that followed. We believe the call was not as scary as the market interpreted it to be. The only way for an analyst to "look good" is to be correct on both sides of the call, and the analyst made a great call upgrading the sector in early July. As smart investors do, he made this call so that his clients could effectively lock in some gains.

As for this downgrade, it was based on the fact that, within the past few months, the technology complex had filled what were abnormally low inventories across the technology landscape and that, at this point, "true" demand needs to kick in in order to drive the sector higher. No doubt, the easy money has been made. This call parallels the debate on revenue growth vs. cost-cutting about which we have written extensively. The rubber is finally going to meet the road. If demand is strong, stocks will go higher. Admittedly, that is a big "if."

Our advice: Love the stocks you own. Still, be protective, and take profits when you can, not when you have to. Do the homework, and understand the catalysts that will drive growth and will allow you the conviction to buy more of what you love if those stocks are sold by skittish investors. In particular, look for companies that can grow their businesses through the difficult economic environment. We believe the model portfolio offers a plethora of qualified names from which to choose. We are looking forward to using a potential broad-market pullback as an opportunity to add new names that may subsequently become mispriced. We have our shopping list ready, just in case.

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

ONES

ArcSight (ARST:Nasdaq, $24.42, 600 shares, 6.66% of the model portfolio): ArcSight is a leading play on the security information and event management (SIEM) sector. The company provides compliance and security-management products that allow enterprises and government agencies to address security threats, monitor compliance controls and ensure business continuity. After hitting a new 52-week high earlier this week, shares of ArcSight proceeded to trade lower. On Wednesday, an article appeared in the "Wall Street Journal" that highlighted the Federal Bureau of Investigation's inquiry into people with suspected links to al Qaeda who have shown an interest in launching cyber attacks against critical types of U.S. infrastructure. Articles such as these reaffirm our belief that our investment thesis is playing out. Also on Wednesday, a First Analysis analyst wrote that he does not believe Cisco's (CSCO:Nasdaq) exit from the SIEM sector represents a large growth catalyst for ArcSight, arguing the Cisco product has not been competitive for quite a long time. The analyst continued to be bullish on ArcSight. In more positive brokerage action, on Friday a Morgan Stanley analyst raised his price target on the stock from $25 to $31, convinced that the company's October quarter has shaped up well. We believe ArcSight continues to represent one of the most compelling secular growth stories in the market today and, given that, the stock remains a core holding in the model portfolio.

AsiaInfo (ASIA:Nasdaq, $24.98, 300 shares, 3.40%): AsiaInfo is the largest provider of enterprise software and services in China's telecom-services market. The company has forged strong relationships with the three major Chinese carriers - - China Mobile (CHL:NYSE), China Unicom (CHU:NYSE) and China Telecom (CHA:NYSE) -- and is benefiting from the country's fast-growing telecom infrastructure and mobile- application buildout. This week, AsiaInfo's stock held its ground on little company-specific news. We are bullish on the strong growth opportunity that lies ahead for AsiaInfo, and we believe the stock can continue to climb over the coming months.

Duff & Phelps (DUF:NYSE, $17.26, 600 shares, 4.70%): Duff & Phelps is a leading provider of independent financial advisory and boutique investment banking services. The company is well positioned to take advantage of two important macro-level developments: a recovery in the mergers-and-acquisition (M&A) marketplace, and an increased focus on fair-value accounting standards and conflicts of interest. On Monday, CEO Noah Gottdiener appeared on Jim Cramer's "Mad Money" show on CNBC and reiterated our belief that investors are now demanding transparency, having been through a rough time in recent years. Duff & Phelps, being a major player in providing the third-party valuations investors require, is poised to benefit from that apparent shift. We are confident that the company's fundamentals are improving, and that it's well positioned for continued growth with an early-stage recovery in the M&A market. As such, we continue to believe that the stock is attractive to purchase at current levels.

Monro Muffler Brake (MNRO:Nasdaq, $29.98, 400 shares, 5.45%): Monro is the largest company-owned undercar care service chain in the U.S., providing repair services, tire products and general scheduled maintenance. Monro is currently benefiting from two tailwinds: the customer dislocation of the closed/closing Chrysler and General Motors dealerships, and the fact that Americans are hanging on to their cars longer due to the economic downturn. Monro's shares held steady this week on little company- specific news. We believe the stock remains attractively valued due to the company's growth prospects.

SBA Communications (SBAC:Nasdaq, $31.73, 225 shares, 3.24%): The company owns and operates wireless communications towers in the U.S., Canada, Puerto Rico and the U.S. Virgin Islands. SBA generates approximately 80% of its revenue from leasing antenna space on its towers to wireless-service providers. The company also provides site consulting and end-to-end construction services for its wireless carrier customers, which generate the remaining 20% of its revenue. On Monday, a Bank of America/Merrill Lynch analyst published a note summarizing his recent meeting with the company, in which he said that management expressed confidence in wireless-development spending by wireless carriers, as well as in the conviction that SBA would be able to achieve its targets for tower portfolio growth (new builds and acquisitions). The analyst raised his price target on the shares from $35 to $39. We continue to believe the company is well positioned to benefit from the "mobile Internet tsunami," and that the stock can continue to climb in the months ahead.

Skyworks Solutions (SWKS:Nasdaq, $12.15, 800 shares, 4.42%): The company is a handset and wireless- infrastructure company with a mobile-platforms segment that accounts for 75% to 80% of its revenue. Skyworks' linear products segment brings in 20% to 25% of its revenue and offers higher-than-average gross margins, longer product cycles and revenue diversification. This week, Skyworks' stock eked out a small gain on little news. We are unabashed believers in the smartphone megatrend, and we are confident that Skyworks is an excellent long-term play in this area. We maintain that the stock is attractive to purchase at current levels.

Sykes Enterprises (SYKE:Nasdaq, $25.32, 225 shares, 2.59%): Sykes Enterprises is a leading global provider of customer contact management solutions and services in the business process outsourcing (BPO) arena. During a light week in terms of company-specific news flow, Sykes shares saw a small lift. We continue to believe that the forthcoming completion of the ICT Group (ICTG:Nasdaq) acquisition will add materially to Sykes' revenue and earnings opportunities, and that this development is creating an attractive entry point for investors.

WMS Industries (WMS:NYSE, $40.77, 250 shares, 4.63%): WMS is a leading designer, manufacturer, and marketer of gaming devices, including video and mechanical spinning reel games and video lottery terminals. WMS stands before three strong growth drivers: 1) a move away from the larger casinos' material underinvestment in refreshing the slot machines on their casino floors; 2) the prospect of escalating momentum among state legislators who are looking to fund budget gaps by increasing the number of gaming sites or, in certain states, by legalizing gambling; and 3) growing international sales opportunities. This week, WMS participated in the Global Gaming Expo (G2E) trade show in Las Vegas, where its new games, including the "The Price Is Right" and "The Lord of the Rings," generated significant buzz. Analysts from firms including Goldman Sachs, JPMorgan, William Blair, and Deutsche Bank reviewed WMS's new product offerings and complimented the company for the games' design and innovation. WMS management is cautiously optimistic about casino operators' capital expenditure budgets, and they characterized the spending environment as seeming to be incrementally positive, relative to this time last year. We remain bullish on WMS and believe the shares are a compelling investment at current levels.

TWOS

Air Methods (AIRM:Nasdaq, $33.85, 250 shares, 3.84% of the model portfolio): Air Methods is the largest provider of air medical emergency transport services and systems in the U.S. The company is primed to take advantage of its cost- cutting efforts, and it could demonstrate significant operating leverage should its flight volumes normalize with an improving economy. We also believe that Air Methods could benefit from the government's proposed health care reform. This week, Democrats in the U.S. Senate released their health care bill, which, if passed, would cover 94% of eligible Americans and reduce the number of uninsured citizens by 31 million. A reduction in those who are uninsured would benefit Air Methods, as it would reduce the amount of nonreimbursed transports it would make. We will wait for a pullback in the share price before adding to our model portfolio position.

Alnylam Pharmaceuticals (ALNY:Nasdaq, $16.84, 450 shares, 3.44%): Alnylam is a biopharmaceutical company focused on developing therapeutics based on RNA interference (RNAi), which is considered to be one of the most notable breakthroughs in modern medicine because it allows scientists to target diseases on a genetic level. On Wednesday, Alnylam presented new preclinical data on ALN- VSP, an RNAi therapeutic for the treatment of liver cancer. Alnylam demonstrated robust antitumor activity in orthotopic liver tumor models (in mice) comprising both hepatic and colorectal cancer-derived cell lines, and we are encouraged by the study's findings. We also continue to believe that the upside of potential new partnerships, as well as the reduced risk afforded by the company's slow cash burn rate and strong balance sheet, supports our continued maintenance of our holding in this name.

Dolby Laboratories (DLB:NYSE, $43.28, 100 shares, 1.97%): Dolby is a global leader in audio technologies used in consumer electronics and professional content productions, such as films and TV programs, and the company benefits from its license-based revenue model and limited competition. This week, initial Black Friday advertisements began to leak out, and we have seen Blu-ray players priced below $100. We believe this sub-$100 price point will drive demand for the devices, which in turn will help bolster Dolby's royalty payments. In addition, Microsoft's (MSFT:Nasdaq) Windows 7 software platform sales are reportedly continuing to sell well. Strong Windows 7 sales are a positive for Dolby, as Dolby receives a per-unit license royalty on four of the six Windows 7 versions on the market. In view of Dolby's robust balance sheet and its potential for revived growth, we will continue to hold the shares at current levels.

Guess? (GES:NYSE, $36.50, 300 shares, 4.97%): Guess? is an international retailer and wholesaler of apparel aimed at young men and women. We like Guess for its strong operational discipline, improving North American business, and growing international exposure. On Wednesday, a Sterne Agee analyst wrote that first-half 2010 same-store sales comparisons should provide the company with the potential for improved sales-trend numbers, given that the basis for those comparisons will be the very poor levels of the previous year. Guess continues to be one of the biggest beneficiaries of a weak U.S. dollar in the specialty retail space. We will look to add to our position on a pullback in shares toward the mid-$30s.

Kansas City Southern (KSU:NYSE, $28.37, 300 shares, 3.87%): The company operates rail freight transportation services in the U.S., Mexico and Panama. The strategy for this play hinges on an economic recovery, as the company has exciting growth drivers that should push the stock higher in an improving market environment. According to a research analyst at Morgan Keegan, Kansas City Southern posted a 0.1% decrease for the week in overall traffic in the U.S. and Mexico. The total traffic decline comes to 5.5% so far in the fourth quarter, an improvement from last week's - 6.5% reading. The total traffic decline came to 10.1% for the third quarter, which was better than the traffic decline of 18.8% in the second quarter and the 15.1% decline in the first quarter. We will look to build up our remaining position in the stock on weakness.

MercadoLibre (MELI:Nasdaq, $45.30, 300 shares, 6.17%): The company operates the largest online trading platform in Latin America. Internet penetration remains low throughout Latin America, providing MercadoLibre with an opportunity for huge growth potential. This week, shares of MercadoLibre hit a new 52-week high on little company- specific news. We will continue to hold our position in the stock at current levels.

Perfect World (PWRD:Nasdaq, $43.70, 250 shares, 4.96%): The company is a leading Chinese video-game developer, and its stable of successful existing games will likely continue to generate solid revenue as the company develops and launches new titles. Perfect World is also a play on increasing broadband penetration and consumer spending in China. On Monday, Perfect World reported better-than-expected third- quarter results and gave guidance that was in line with Wall Street's expectations. As we had pointed out in our preview, expectations were high headed into the quarter, and "conservative" guidance did not suffice to keep the stock's price from sliding. We see a number of growth catalysts for the company in the fourth quarter, including a full-quarter contribution from game title "Fantasy Zhu Xian," an expansion pack for "Perfect World II," and strong seasonality for the gaming industry. We maintain that the stock is attractive to hold at current levels.

Shaw Group (SHAW:NYSE, $27.69, 175 shares, 2.20%): The company offers an array of services, including engineering, design, and construction, for projects ranging from power plants to environmental cleanup. Its 20% stake in nuclear plant designer Westinghouse Electric gives Shaw exclusive access to engineering work on any its AP1000 reactors, which leaves the company poised for huge upside potential based on prospective nuclear projects. On Monday, Shaw announced that the U.S. Department of Defense has awarded the company with a contract for construction services at Naval Facilities Engineering Command (NAVFAC) installations throughout California, Arizona, Nevada, New Mexico, Utah and Colorado. The undisclosed value of the contract was included in Shaw's fiscal fourth-quarter backlog. On Wednesday, Shaw announced that it was selected to license proprietary refinery purification and recovery technology and to supply process-design services to Yanchang Petroleum in China. The undisclosed value of the contract will be included in the company's backlog for the first quarter of fiscal-year 2010. We believe that downside in the stock is limited by the company's huge cash position and by low expectations for its business units, and that there could be tremendous upside in the stock should a "nuclear renaissance" take hold in the U.S. As such, we will continue to hold our current position in the name.

VanceInfo (VIT:NYSE, $17.33, 300 shares, 2.36%): VanceInfo is a leading offshore information technology (IT) services vendor headquartered in China that is focused on research and development (R&D) and enterprise-solutions services. Interactive Data Corp. has ranked VanceInfo as the top Chinese offshore software-development service provider for the North American and European markets. On Tuesday, VanceInfo reported better-than-expected third-quarter results and guidance that came in ahead of consensus expectations. However, expectations for the results were high given the stock's recent move up. Plus, the tone of the conference call was disappointing, as management peppered the conversation with phrases such as "softness" and the "cautious pace" of new bookings. Alas, the quarter was good, but not good enough for Wall Street, and the stock sold off 7% on the week. We continue to believe in our investment thesis for VanceInfo and believe the stock will be a winner in the long term. The company's fundamentals have not materially weakened, and we will look to add to our position in the event of an additional pullback.

Vocus (VOCS:Nasdaq, $17.31, 400 shares, 3.15%): Vocus is a small-cap company in the software as a service (SaaS) industry, focusing on providing public relations (PR) management to companies across a wide range of industries. We believe that the company's near-term success depends entirely on a pickup in the macroeconomic environment. Shares of Vocus closed lower on the week as the insider sales continued. On Nov. 17, Kevin Burns -- a director of the company -- sold 11,000 shares. This sale comes on top of his sale of 11,333 shares on Nov. 5, and it leaves him with a total of with 10,460 shares. We are working on obtaining some color surrounding these two sales (as well as recent share sales by CEO Rick Rudman), as these insider sales are making us grow increasingly cautious on the name. We will continue to hold our position for the time being, but we will wait for signs of improvement in Vocus' fundamentals before becoming more bullish.

Regards,

Bryan Ashenberg & the TSC Research Team

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