Stocks Under $10 Weekly Summary

As earnings season wrapped up, news flow was decidedly slower for the names in the model portfolio this week than it has been recently. It was a quiet week for economic data as well, though investors were encouraged by the continued decline in jobless claims as shown by the weekly report that came out Thursday.

One trend that stood out from the trading activity was that small-cap stocks underperformed the gains seen in the broader stock market averages this week. The Russell 2000, which is benchmark for our model portfolio, ended the week just 1% higher, compared with a 2.3% gain in the S&P 500, which reached a 13-month closing high on Wednesday.

We used relative weakness in the small-company universe to add two names to the model portfolio this week. On Tuesday, we bought 350 shares in biotechnology firm Vivus (VVUS:Nasdaq ), in large part based on the market-leading data for its proposed obesity drug, Qnexa.

Then, on Thursday, we purchased 750 shares of scrap-metal recycler Metalico (MEA:Amex). This move helps to diversify our holdings in the group away from Yamana Gold (AUY:NYSE), in which we took some profits and moved down to a Two rating earlier in the week.

Now that earnings season has passed, we're using this period to research more potential new names for the model portfolio, especially in the financial and energy sector, where we currently do not have any direct exposure.

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 have catalysts to boost their share prices.

Also, Ones are stocks that we would buy at their current quotes, Twos are stocks that we would buy on a pullback, and Threes are names that will likely be sold into strength.

ONES

Art Technology (ARTG:Nasdaq, $4.23, 1,000 shares, 3.56% of the model portfolio, Stealth Stock): The company produces software that allows users to develop and optimize e- commerce Web sites. Shares continued to run higher this week, back up toward its July highs. Even though Art Technology is trading 12% above our average cost-basis, we still believe shares can move higher, as the company is carrying a lot of momentum into 2010.

Cott (COT:NYSE, $9.04, 600 shares, 4.57%, Stealth Stock): Cott produces and distributes soft drinks, noncarbonated beverages and bottled water, primarily focusing on private- label items sold by major retailers. The stock marked time this week, and was likely hit by some profit-taking. We also have a 41% average gain in our model portfolio position, so we will consider booking some gains if the shares move closer to $10 in the coming weeks.

Diamond Management & Technology (DTPI:Nasdaq, $7.39, 700 shares, 4.36%, Stealth Stock): The company provides technology-consulting services to businesses in a variety of industries. The stock kept up its recent winning ways, gaining 9% on the week. The shares caught a lift from a report that CEO Adam Gutstein bought 1,800 shares on the open market, following Diamond Management's recent strong earnings report. The company also declared its next 7-cent quarterly dividend that investors will qualify for at the close of trading on Nov. 17. Given that the stock is now trading 28% higher than it was when we added to our position on Oct. 30, we advise readers to wait for the next market pullback before buying additional Diamond Management shares.

Kopin (KOPN:Nasdaq, $4.42; 800 shares; 2.98%; Game Breaker): Kopin manufactures semiconductor wafers that are used in wireless and fiber-optic equipment. The company also makes small LCD screens that are used in a number of products, including consumer electronics and night-vision military gear. The shares lost some ground earlier in the week, but made it all back on Friday as the brokerage Needham initiated coverage on the company with a buy rating. We maintain that the stock can move higher as more investors become aware of Kopin's growth prospects. With that in mind. we'd consider using the next market pullback to add to our stake and take our position in Kopin up to 1,000 shares.

Martha Stewart Living Omnimedia (MSO:NYSE, $5.22; 1,000 shares; 4.40%; Inflection Point): The company publishes magazines, produces broadcast media and licenses products to retailers surrounding the homegoods segment. Its core brands are centered on its founder and controlling investor, Martha Stewart. The stock mirrored the volatility in the overall market this week, ending slightly higher than last week. We continue to believe that Martha Stewart shares are attractively valued, given that the publishing business appears to be at an inflection point. Plus, the company has several new merchandising deals set to start in early 2010.

Metalico (MEA:Amex, $4.02; 750 shares; 2.54%; Stealth Stock): Metalico recycles scrap metals, including steel, iron and aluminum. The company also manufactures lead products. We initiated a 750-share position in Metalico in order to help diversify our metals holdings in the model portfolio, and to reinvest some of the profits we made with Yamana Gold (AUY). Metalico's earnings are tied to the price of base metals, which are down dramatically year over year, but which have improved over the past two quarters. Additionally, management has cleaned up its balance sheet, reducing total debt by nearly 40% in 2009, as of the end of the third quarter. We believe these trends will continue into 2010 as industrial demand recovers, and that the company is positioned well to see considerable operating leverage. As a result, we believe the stock could trade up toward $6 in the coming quarters.

Stereotaxis (STXS:Nasdaq, $4.12; 1,200 shares; 4.17%; Game Breaker): The company's main product is the Niobe system, a remote-controlled cardiology instrument system that aids in the treatment of atrial fibrillation (AF) through the use of catheters. The stock pushed higher this week, boosted by competitor Hansen Medical's (HANS:Nasdaq) continuing struggles with accounting issues. There are no such problems at Stereotaxis, which has seen order momentum recover in the second half of the year. As Stereotaxis' network of Niobe systems continues to expand, the company's growing recurring revenue stream should help drive Stereotaxis to profitability by early 2011.

Vivus (VVUS:Nasdaq, $7.75; 350 shares; 2.29%; Game Breaker): Vivus is a biotech company that is developing a product for the treatment of obesity and diabetes. The company also has a line of existing and potential treatments for erectile dysfunction. We initiated a 350- share position in Vivus on Tuesday, as we believe the company has the lead candidate of three late-stage products that are trying to reestablish the prescription obesity- treatment market. More than $50 billion a year is spent on weight-loss treatments in the U.S. alone, although most sales are for over-the-counter products. Among its rivals in the sector, Vivus' obesity drug Qnexa has shown the most efficacy in weight loss; the company has already conducted trials with thousands of candidates. It's also important to note that the drug has been effective in lowering blood pressure, lipids and blood sugar in diabetic patients, because the Food and Drug Administration (FDA) has not approved a weight-loss drug since the agency took Phen-Fen off the market in 1997 for safety reasons. That said, we don't believe that Qnexa and its competitors have any similar safety issues, and this area is broad enough to support more than one blockbuster emerging from this space in the coming years. At current levels, the stock is trading about $3 lower than it was when Vivus placed a secondary offering back in September -- and that action has helped solidify the company's finances. Given the expectation for an FDA filing for Qnexa later this year, as well as a potential partnership deal in 2010 with a major pharmaceutical name, we believe the stock could trade back into the double digits even before the drug is approved.

Wendy's/Arby's (WEN:NYSE, $4.16; 900 shares, 3.15%, Inflection Point): The company operates more than 10,000 quick-service restaurant locations in the U.S. and more than 20 other countries under its two namesake brands. The stock gave back about 6% this week on little news. We continue to believe that a turnaround at the company is under way, driven by new menu items at the Wendy's chain. Therefore, we'd consider buying another 200 or 300 shares for the model portfolio if the stock moves below $4 in the coming weeks.

Zix (ZIXI:Nasdaq), $1.83; 3,000 shares; 4.63%; Stealth Stock): The company is a leading producer of email encryption software. Zix is also exploring strategic alternatives for its unprofitable e-prescribing division, which allows doctors to automatically send information to pharmacies. The stock marked time this week, with the company announcing a new three-year customer contract Tuesday. Although Zix continues to see healthy growth in this area, the stock may remain in a narrow trading range until management achieves a resolution with its e- prescribing division.

TWOS

Del Monte (DLM:NYSE, $11.00; 600 shares; 5.56%; Inflection Point): The company produces and markets a variety of food and pet products for the retail sector. The stock fared well this week in a volatile trading environment. We will wait for a pullback under $10 before we'll consider buying additional Del Monte shares ahead of the company's earnings report in 2010.

Epiq Systems (EPIQ:Nasdaq, $12.62; 300 shares; 3.19%; Stealth Stock): The company provides products and services for some of the world's largest law firms that specialize in bankruptcies and class-action lawsuits. There was little movement in the stock this week, but we'll be listening closely to Epiq's presentation at an investment conference in Chicago on Tuesday. Following another quarterly earnings disappointment, we are gauging whether or not there are enough positive reasons to keep the company in the model portfolio into 2010.

Imax (IMAX:Nasdaq, $11.09; 400 shares; 3.74%; Inflection Point): The company specializes in digital and film-based motion picture technologies, as well as large-format, two- dimensional (2D) and three-dimensional (3D) film presentations. The stock appears to have stalled around its recent highs, even though Imax generated an impressive 14% of the total domestic gross box office for last week's leading movie, "Disney's A Christmas Carol." The film generated $30 million during its opening weekend alone, a number that's even more impressive considering the fact that the Imax format only accounted for 3% of the movie's total screens. The company's business model of an expanding theater network, especially overseas, coupled with securing the rights to top Hollywood blockbusters, should continue to drive profit growth over the next several quarters.

Kenneth Cole Productions (KCP:NYSE, $9.24; 400 shares; 3.11%; Inflection Point): Kenneth Cole designs and markets apparel and accessories for men, women and children through more than 7,500 department store and specialty store locations. The stock pulled back about 7% for the week, giving back most of the gains it had pulled in after its recent earnings report. Even so, given management's tepid fourth-quarter guidance, we plan to wait for another 10% decline in the stock before we'll consider buying back some of the shares we previously sold at higher levels.

King Pharmaceuticals (KG:NYSE, $11.14; 300 shares; 2.82%; Inflection Point): King Pharmaceuticals develops, manufactures, markets and sells branded prescription and animal health products worldwide. The stock held onto its recent gains this week after the company gave an upbeat presentation at the 2009 Credit Suisse Healthcare conference in Phoenix on Thursday. Most of King's potential catalysts have been pushed out to 2010 but, in the meantime, we maintain that the company still has value in its clinical pipeline of new pain medications.

Mylan (MYL:Nasdaq, $17.54; 400 shares; 5.91%; Inflection Point): Mylan manufactures and develops generic pharmaceuticals with a focus on cardiovascular, central nervous system, dermatology, gastrointestinal, endocrine and metabolic, and renal and genitourinary products. The stock held its ground this week after the company said on Tuesday that it had received FDA approval for its generic version of delayed-release drug Prevacid. The heartburn treatment generated $3 billion in revenue over the 12 months ending in June, so this is definitely a product that will have a material impact on the company's earnings. Based on this development, we continue to believe that Mylan shares can trade up toward $20 over the coming months.

TriQuint Semiconductor (TQNT:Nasdaq, $5.53; 800 shares; 3.73%; Inflection Point): TriQuint produces integrated circuits for a wide range of industries, including wireless handsets and communications networks. The stock bounced around this week along with the overall market as the brokerage FBN Securities started coverage on the company with a sector perform rating Wednesday. We're also encouraged by the recent open-market purchase of the stock by CEO Ralph Quinsey, and we continue to believe that TriQuint shares will bounce back if management achieves its target for a sequential rebound in sales for the fourth quarter.

Yamana Gold (AUY:NYSE, $12.71; 400 shares; 4.28%; Inflection Point): Yamana is a gold and copper exploration company with seven operating mines and several ongoing development projects in Brazil, Argentina and Chile. We moved the stock's rating down to a Two on Monday, while selling 100 shares, as Yamana was trading 130% above our average cost-basis. Gold prices reached new record highs this week, and the company should be able to deliver above- average growth over the next several quarters, driven by the opening of a few new mines. With that in mind, Yamana will remain a core holding in the model portfolio; however, we've now begun to diversify our holdings in the metal industry with Metalico.

THREES

McDermott (MDR:NYSE, $23.05; 100 shares; 1.94%; Inflection Point): McDermott is an infrastructure company that operates in three segments: Offshore Oil and Gas, Government Operations and Power Generation. The stock sold off this week, even though McDermott announced strong third- quarter results on Tuesday. Although sales and earnings came in better than expected, the company's backlog fell because of lower order rates. That said, demand can fluctuate from quarter to quarter, and we expect that McDermott will continue to post solid growth going into 2010, driven by its energy division. As we add new names to the model portfolio, we may consider selling our remaining position into strength.

Regards,

David Peltier & the TSC Research Team

David welcomes your questions on Stocks Under $10. Please email David with your questions at stocksunderten@thestreet.com. However, please remember that Stocks Under $10 is not intended to provide personalized investment advice. Do not email David seeking personalized investment advice, which he cannot provide.