Perficient, Harmonic Join Stocks Under $10 Watch List

With so much happening in the market recently, we want to update you on our analysis and examine two new stocks that we have added to our watch list on TheStreet.com Stocks Under $10 service. Much of this article went to our subscribers earlier this morning. (If you'd like to see our alerts as they occur, please click here for a free trial.)

Now, to the market: Three weeks ago, Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) announced that it was being bought in a fire sale by JPMorgan Chase(JPM Quote - Cramer on JPM - Stock Picks), the Federal Reserve increased liquidity using measures not seen since the Great Depression, and most economic data pointed toward a huge slowdown in consumer spending.

Today, listening to the financial pundits, it seems as if everything is OK on the liquidity front; our economy will avoid slipping into a recession; and we've now hit a bottom in the equity markets.

So our question is if this is a bottom, why is Treasury Secretary Henry Paulson trying to overhaul our entire financial system? After all, according to the media, the downfall was limited to Bear Stearns and a few aggressive mortgage brokers. The Dow Jones index is down only 5% on the year, and Fed Chairman Ben Bernanke made it clear Wednesday that he will back up all the major investment firms and banks in case of further liquidity problems.

Looking at the data from just this week, UBS(UBS Quote - Cramer on UBS - Stock Picks) announced $19 billion in writedowns and fired its chairman; Deutsche Bank(DB Quote - Cramer on DB - Stock Picks) said that it expects to write down $4 billion in subprime and Alt-A loans; and Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks) announced that it would raise $4 billion through a convertible offering.

All three of these stocks rose sharply following their announcements because Wall Street interpreted this news as an indication that the worst is over, hence the "kitchen sink" theory.

In other words, if this is the case perhaps Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) and Citigroup(C Quote - Cramer on C - Stock Picks) should take double the writedowns and raise as much cash as possible when they report two weeks from now, given that these strategies worked out pretty well for their competitors.

Looking at the bigger picture, common sense says it's difficult to believe that we are at a bottom and that the worst is over just because investment firms and banks are reporting larger-than-expected writedowns. After all, the government and the Fed are taking measures not seen since the Depression, and we are arguably not even in a recession.

This disconnect has us worried, and also leads us to believe that the equity markets still have more downside risk than upside potential. While it is difficult to remain on the sidelines when financials and homebuilders are rallying, use your common sense and invest wisely.

You can do this by taking small positions and building them up over time, using the current increase in volatility to your advantage. Also, not all financials, homebuilders and retailers are the same, yet it seems as if they're all rallying together.

It's important to look at balance sheets, management, insider buying/selling and how each company has dealt with the slowdown in the U.S. economy. This will limit your downside risk and lead to higher returns.

Turning to the model portfolio, we've added Perficient(PRFT Quote - Cramer on PRFT - Stock Picks) and Harmonic(HLIT Quote - Cramer on HLIT - Stock Picks) to our Watch List this week.

Perficient is an IT software and consulting firm that made headway over the past five years by claiming a small piece of an industry dominated by larger players like Electronic Data Systems(EDS Quote - Cramer on EDS - Stock Picks) and Unisys(UIS Quote - Cramer on UIS - Stock Picks).

By focusing on the needs of small to midsized companies and by acquiring other small consulting firms with strong regional connections, Perficient has been able to generate impressive double-digit growth in both earnings and revenue. For example, revenue growth was more than 60% in both 2005 and 2006.