Breakout Stocks

About

Bryan Ashenberg

The Street.com Breakout Stocks is designed to identify tomorrow's large-cap stocks while they are still small- and mid-cap stocks. A breakout stock, as we refer to it, is a stock that is off the radar screen of the media and most investors, both individual and institutional, but has above-average growth prospects that aren't fully reflected in the stock's current valuation. In other words, we want to exploit Wall Street's lack of interest and coverage of some of the best performing stocks in the market, allowing us to get in ahead of the investment crowd.

If you've underperformed the stock market over the past few years by owning widely held stocks such as General Electric (GE:NYSE) and Pfizer (PFE:NYSE), don't be too hard on yourself. Wall Street analysts and much of the media spend a majority of their time and resources focused on widely held large-cap names. But the small- and mid-cap stocks have been the ticket to outperforming the market.

The proof that small- and mid-cap stocks have the potential to outperform large-cap stocks is in the numbers. As measured by the S&P 500, large-cap stocks are down about 18% since the beginning of 2000. During the same time period, a combination of small-caps and mid-caps, as measured by the S&P 400 mid-cap and S&P 600 small-cap indices, has delivered an impressive 63% return.

By following the recommendations of the larger brokerage houses and mutual funds alone, you likely wouldn't have come close to returning 63% on your money. We want to level the playing field for investors by offering sound fundamental research and analysis on these often ignored small- and mid-cap stocks so you have the opportunity to get the most out of your investment portfolio.

Criteria for inclusion in TheStreet.com Breakout Stocks:

• Minimum market cap of $250 million
• Maximum market cap of $6 billion
• Minimum average daily trading volume of 100,000 shares
• Minimum price of $15 a share

We start with a defined universe of stocks with market caps between $250 million and $6 billion. At the time this was written, there were well over 1,000 stocks from the likes of American Eagle Outfitters (AEOS:Nasdaq) to Palm (PALM:Nasdaq) that matched our criteria, so there is no shortage of ideas. In order to eliminate illiquid stocks that don't trade much volume, we will only research and recommend stocks with average daily trading volumes in excess of 100,000 shares. This basically mimics the constitution of the S&P small- and mid-cap indices, which we will use as a benchmark for the model portfolio's performance. Given the volatility associated with low-priced stocks, we won't recommend stocks priced below $15 a share.

Don't be afraid to invest in a stock that you haven't heard of prior to subscribing to TheStreet.com Breakout Stocks. To some degree, alerting you to stocks that you wouldn't ordinarily take an interest in or hear about from the Wall Street Journal or on CNBC is our focus.

We are constantly on the lookout for ways within our universe of stocks to invest in emerging trends. For instance, the current trend among corporations away from traditional installed software programs from the likes of Oracle (ORCL:NYSE) and Microsoft (MSFT:NYSE) toward on-demand software from emerging companies such as Salesforce.com (CRM:NYSE) provides a blueprint for what we are looking for.

For years, corporations have been bogged down with the high installation and maintenance costs that accompany doing business with traditional software vendors. But newcomer Salesforce.com has changed the software model by offering Web-based customer relationship management (CRM) software that is cheaper to install, easier to use, and has a higher return on investment. Salesforce.com shares more than doubled from mid-2004 to year-end 2005, while Oracle and Microsoft shares are up by a combined 2%.

Another example would be the grocery industry where consumers are opting not to shop at A&P and ShopRite in favor of upstart Whole Foods (WFMI:Nasdaq). Whole Foods is winning customers with its focus on organically grown foods and a large selection of quality prepared meals. And while the stocks of grocers like Albertson's (ABS:NYSE) and Safeway (SWY:NYSE) were virtually stuck in the low $20s in 2005, Whole Foods shares emerged from the small- and mid-cap universe by more than doubling over the past three years and are now trading above $100.

We will also be on the lookout for small- and mid-cap stocks in industries that we believe are primed to outperform. It is often the smaller companies within an industry that yield the highest returns for investors during a bull market. Take, for instance, the two-year rally just experienced in the energy industry. Shares of Chevron (CVX:NYSE) and Exxon Mobil (XOM:NYSE) are up a handsome 55% combined over the past two years. But formerly off-the-radar companies such as Chesapeake (CHK:NYSE) and Cabot Oil & Gas (COG:NYSE) have returned investors 170% during this same time period.

In order to maintain a portfolio of quality stocks, we will only invest in companies at or within a quarter or two of profitability based on our expectations for earnings growth and the consensus expectations of Wall Street analysts. Also, we will do an in-depth analysis of the cash flow statements and balance sheets of prospective recommendations to ensure adequate liquidity is available to meet funding requirements in the coming 12-month period.

TheStreet.com Breakout Stocks will be an alert-based service that will provide updates on model portfolio holdings as well as a weekly summary to recap important events and our opinion on each holding.

We plan to have as many as 25 positions in the model portfolio at any one time, and will likely hold at least 15 positions at all times. We won't daytrade our positions, but we will be relatively active as we look to take advantage of what we perceive to be opportunities to make changes in response to market action. With that in mind, this service will be helpful both to long-term buy-and-hold investors as well as active traders. We will be a long-only portfolio and won't offer up short suggestions.

However, as a bonus from time to time, we will highlight a stock that isn't in the model portfolio that we believe is overpriced and should be avoided.

When we initiate new positions, we will send out an alert to subscribers laying out our reasons for being bullish on a particular stock, how long we expect it to take for our bullish thesis to play out, what type of potential upside we believe is possible, and risks to our thesis. We won't add a stock to the model portfolio until our subscribers have time to check their emails. And we will alert readers before we decide to close a position out.

We will also maintain a homepage, which will include the current makeup of the model portfolio, our gains and losses on current and closed positions, and an archived version of every alert we issue. Also, you can always email us at here with questions or concerns, and we will do our best to answer all inquiries.