Echelon Corporation (ELON – Nasdaq)

Dear Bottarelli Research Member,

In all my years of trading, I have never witnessed intra-day swings of this magnitude. For example, this Thursday’s 335-point reversal, which happened right at the Dow’s 200-day moving average, tells me that the markets have probably hit their bottom. If I’m right, then we’ve witnessed a classic 10% correction within a bull market – and I truly think come Christmas, we’ll be trading at or near the high water mark we’ve seen this year. This means that the Dow will recover 1,500 points and retest the 14,021 high – setting the stage for a nice year-end rally leading into 2008.

But more importantly, this “flush out” will give us some great buying opportunities – both with the small-cap stocks that we already have, and also with some exciting new additions I’ll be telling you about in the next few weeks. So stay tuned, and make sure you keep some powder dry for buying great stocks at heavily discounted prices. I want to be sure that everyone is properly positioned to fully capitalize on this move.

On that note, let’s dive right into this week’s updates:

Basin Water (BWTR – NASDAQ): The company reported Q2 earnings this week, and some considered them to be weaker than expected. But for those of us who understand that BWTR is a company that just went from the start-up phase to their current position (a company with a $193.50 million market cap that’s rapidly expanding their customer base) it’s clear that this is still a fantastic growth story in the very beginning stages. I feel that every independent water company is going to use BWTR’s technology, and with water getting more and more scarce, I remain extremely bullish on the entire water sector. Please use this weakness to buy BWTR.

Metalline Mining (MMG – AMEX), Minera Andes (MNEAF.OB), Polymet Mining (PLM – AMEX) & Idaho General Mines (GMO – AMEX): Each of the metal plays listed above are giving us very good buys. As usual, the entire metals sector gets soft over the summer months, but come this fall/winter, I firmly believe they are all going to move much higher as the next leg of the commodity bull market kicks into high gear. Each company listed above is unique in its own way, and I want to remain positioned to ride the continued demand for zinc, molybdenum, copper, nickel, silver, and gold by owning the small-cap companies in the very best position to supply the demand increases. The major metals companies are loaded with cash and looking to expand their commodity footprint, and every company named above could be an excellent takeover candidate.

Cereplast (CERP.OB): With all the negative talk surrounding Mattel (MAT – NYSE) and their hazardous toys from China, I think the upcoming roll-out of CERP’s “Green Toy” products will spark some very nice upside leading into the Christmas holiday. Like Bryan said, if a high-profile name like Oprah comes out and endorses CERP’s “Green Toys,” you better believe this little gem is going to get a major boost.

Yellowcake Mining (YCKM.OB): Uranium prices have pulled way back from their recent highs, and this could be contributing to the recent weakness in YCKM. But remember, this company is in the drill process, and they are moving quickly to prove their reserves. Now that everything has been finalized with the Strathmore Minerals J/V, I believe we should be getting news from them over the next couple months. Let’s hold on for this upside trigger.

And now let’s get into this week’s pick – a company that Bryan and I both believe has a lock on the next wave of energy conservation.

A quick look at this company’s latest earnings – and their impressive list of recent customers – and it’s clear to see that these guys are on fire. They’re involved in networking products that can monitor and save energy for a wide range of sectors, including utilities, buildings, industrials, transportation, and home control systems. Folks, as I dug into this market sector over the last few months, I can tell you that this is a huge market – one that’s much larger than you may even imagine.

As I’m sure you know, the cost of energy has a major impact on the bottom line of every company across the globe, and the technology this company owns can save companies anywhere between 20% and 80% per month. This past June, for example, Computer World magazine reported that retailer Eddie Bauer has seen a 20% reduction in their yearly energy costs through the installation of this technology. Not only that, but U.N. Secretary-General Ban Ki-moon and California Governor Arnold Schwarzenegger just toured this company’s energy efficient headquarters on Friday, July 27^th and applauded their technology’s ability to offer energy efficiency and cost savings to the masses.

But it gets better. You see, McDonald’s (MCD – NYSE) just announced that they intend to use this company’s technology for their “kitchen of the future.” Can you imagine the tremendous exposure this will give this growing company?

Combine their latest earnings with their rapidly growing customer list, the huge market they still have in front of them, and the global push for a fight against global warming, and I think this company has a lot further to run. Now don’t get me wrong – this is another stock that has been moving fast. It was launching rather quickly, in fact, but has now pulled back, handing us a tremendous opportunity to get in before it blasts off once again.

The company is Echelon Corporation (ELON – NASDAQ) and let’s buy it here under $23.50 per share. Don’t forget to use the 3% rule if shares are jumping up.

I’ll let Bryan fill you in on this amazing technology.

Have a good week!

Sincerely,

“Echelon’s technology will enable our franchises to create restaurants that are easier to operate, facilitate preventive maintenance and provide new services while saving energy.”

- Bob Langert, McDonald’s Vice President of Corporate Social Responsibility

Today’s investment opportunity starts with a term called a “Negawatt.”

The term was introduced by a fellow named Amory Lovins. In a 1989 speech surrounding Colorado Public Utilities, Mr. Lovins found a typo in his report: The term “megawatt” was typed as “negawatt.”

Instead of correcting the mistake, Mr. Lovins used the typo as a way to describe a watt of electricity that wasn’t created due to energy efficiency – and the term quickly caught on. After all, the greenest and cheapest type of energy is energy that never has to be produced. Therefore, the easiest, fastest, cheapest, and ultimately cleanest way to meet new power demand is to keep that demand from ever occurring in the first place.

As the concept spread, negawatt power evolved into a way of supplying additional electrical energy without increasing generation capacity. So instead of increasing electrical generation capacity to fulfill supply, the negawatt model works by utilizing consumption efficiency to increase electrical supply.

Why use 100 MW hours to light a building, for example, when you can light that same building for only 60 MW hours? That’s the idea behind the negawatt theory.

Energy consumers across the world are beginning to realize that certain actions (like shutting off air conditioners for short periods of time) help to create a hypothetical unit of “saved” energy. As a result, these saved energy units – called negawatts – are created, allowing millions, perhaps billions, of energy savings on a global scale.

Now I admit that in theory, it all sounds fantastic. But there’s one big problem: How can negawatt energy be properly managed to fully utilize its remarkable potential?

That, my friends, is where Echelon Corporation (ELON – NASDAQ) comes into play.

Echelon produces over 90 products that apply the negawatt model to conserve energy. They offer a suite of network infrastructure products, highlighted by their LonWorks product line, that serve building, industrial, transportation, utility/home, and other automation markets here in the U.S. and also in China, France, Germany, Hong Kong, Italy, Japan, Korea, the Netherlands, and the United Kingdom.

The timing for a company like ELON is right on the money for a number of reasons. First off, concerns over global climate changes have forced companies like TXU (TXU – NYSE) to cut back on the number of new conventional-coal plants they planned to build from 11 to 3. At the same time, FPL Group (FPL – NYSE) is also having problems getting regulatory approval to build any new coal-fired plants.

With coal plants unable to meet the rising energy demand, this would appear like a big opportunity for nuclear, solar, and wind power to come in and capture this market. And you’re right. Over the longer term, these alternative energy sources will most likely provide a good portion of our future energy demand. But the reality of the current situation is that zero-emissions energy sources simply cannot scale up quickly enough to meet today’s demand, and that makes a very compelling argument for a company like Echelon Corporation (ELON – NASDAQ).

Since the demand for electricity is increasing at 2.7% per year, but new coal plants aren’t being built and alternative sources aren’t able to meet today’s current demand, it’s obvious that something has to be done to address the situation. That’s why a “demand management” company like Echelon makes so much sense.

In fact, Itron (ITRI – NASDAQ) is a company that I’ve successfully played call options on in my Bottarelli Research Options service, and as you can see by the chart below, ITRI has been engaged in a very nice 6-month up-trend. ITRI and ELON are the two major players in the “demand management” market, and I fully expect the up-and-coming negawatt company, ELON, to mirror these high returns.

Now that you understand the concept and potential of negawatt energy, the next thing is to understand how ELON’s technology works.

Most commercial buildings across the U.S. have a number of subsystems – including things like security systems, lighting systems, elevators, power, safety, and HVAC. While all of these components are crucial to keeping a building running, they’re all operated off separate controls. What Echelon did is pioneer a building system that automatically automates the entire maintenance process – creating one single, unified operating system.

Dubbed as “smart meters,” these single units can be installed in both residences and businesses alike, and they not only manage the daily operation via a sophisticated network of computers, sensors, and wireless technology, but they also manage electricity consumption using the negawatt technology model. By controlling things like air conditioners, refrigerator units, and other large electricity-consumption sources, ELON offers monthly savings between 20% and 80% on your energy bills. As you can imagine, the market for this technology is massive. Just look at all the possible applications:

Building Automation: HVAC and lighting subsystems account for 70% of the average commercial building’s energy use, which is a massive line item on the budget. But using Echelon’s smart building automation technology can reduce that cost by 30%.

Home Automation: Echelon-based control devices in every home in America could seamlessly network your entire house (including living room lamps, ceiling fans, window blinds, and appliances) and also reduce your energy bills. Millions of homes around the world are already equipped with some type of Echelon-based control device, but this hasn’t even scratched the surface of the market potential.

Industrial Automation: Factories and plants around the world could use ELON’s technology to monitor and control everything from waste water management systems to Web processes – all while reducing monthly energy costs.

Transportation Automation: From New York to Paris, mass transit carriers like trains, subways, buses, airplanes, and ships could all benefit from ELON’s control networks in major cities around the world.

This leads into the big opportunity…

As you read this today, most of ELON’s success stories have NOT occurred here in the U.S. Rather, most of ELON’s high-profile projects have come overseas – and that’s why ELON is still relatively unknown to U.S. investors. For example:

Brussels, Belgium: ELON’s LonWorks technology was used on a 100-year-old Park Atrium office building to cut its energy usage in half.

Milan, Italy: ELON’s LonWorks network was applied to “Il Sole 24 Ore SpA,” which is the media company behind Italy’s most widely read financial daily newspaper. With the newspaper office open 24 hours a day and a radio station broadcasting around the clock, the company wanted to integrate their building management and cut costs at the same time – something they achieved with ELON’s help.

Aachen, Germany: The BOB (Balanced Office Building) used ELON’s technology to fully integrate their HVAC and lighting systems, which resulted in lighting costs 80% lower than those in similar office buildings.

Jena, Germany: Life-Sciences company BioCentiv used ELON’s technology to automate their metering systems, which created more accurate energy bills and also reduced their operational staff by 50%.

Warsaw, Poland: DaimlerChrysler used ELON’s LonWorks technology to integrate their building’s HVAC, lighting, and emergency systems.

With such a successful overseas track record, it’s only a matter of time before ELON’s technology catches on here in the U.S. And if you look closely, you’ll see that ELON is quietly expanding their global footprint and attracting some of the most powerful companies in America.

The Bellagio Hotel in Las Vegas uses ELON’s control systems to monitor and control the hotel’s intricately staged water fountain productions. Plus, Bose Corporation uses ELON’s technology to manage and distribute over 400,000 digital voices.

But the biggest news for ELON came July 10^th of 2007 when McDonald’s, the world’s leading restaurant with more than 30,000 locations in 100 countries, encouraged all their kitchen equipment manufacturers to lower their operating costs and improve their operations by incorporating Echelon’s LonWorks technology.

The average McDonald’s restaurant wastes thousands of dollars a year in energy costs – and ELON’s LonWorks technology will help them create the “kitchen of the future” by lowering energy consumption and increasing operational efficiency.

According to Bob Langert, McDonald’s vice president of Corporate Social Responsibility, “Echelon’s technology will enable our franchises to create restaurants that are easier to operate, facilitate preventive maintenance and provide new services while saving energy.”

Since ELON’s systems communicate using existing power lines, McDonald’s (and every other customer across the globe) can easily install ELON’s equipment without tearing out walls. McDonald’s tested various alternative technologies, including radio frequency (RF) technology, but concluded that Echelon’s technology was the most reliable and cost-effective solution.

That’s the thing: As McDonald’s begins installing ELON’s technology in their 30,000 worldwide locations, ELON looks poised for tremendous exposure and tremendous growth. And like I mentioned, that’s only the beginning.

With a market cap of $865 million and quarterly revenue growth of 37%, it’s clear that the potential for explosive future growth is available to early shareholders like you and me. With a balance sheet that includes $117 million in cash and zero debt, it’s easy to see why ELON has gained 148% over the last 52-weeks. The upside momentum is just beginning to get kick-started, so let’s use this recent pullback as a prime opportunity to buy ELON and ride the upside push for uncommon returns.

PLAY: Buy shares of Echelon Corporation (ELON – NASDAQ) at or under $23.50, good for the week.

P.S. I’d like to close today’s bulletin with my comments on the recent market action, because I truly believe that we’ve now established a near-term bottom. For example, let’s not lose sight of the fact that the Dow just hit a historic high at 14,021 on July 17^th. Exactly one calendar month later, the Dow was trading for 12,545 – good for a 1,476 drop over 30-days time. Quick math shows that we’re talking about a 10% correction, which is well within the parameters of any longer-standing upside run.

Another important point: Markets always lose value faster than they gain value. For example, the Dow took 3 ½ months to gain 1,500 points (moving from 12,500 in mid-May to 14,000 in late July), yet it took only one month to lose these gains — with 1,000 of these points coming over six trading sessions! To my eye, this does not exhibit the characteristics of a new longer-term bear market trend, but rather a moment of panicked selling within the parameters of a sustainable bull market. Now that this action is behind us, we should once again move higher as we close out the 2007 calendar year — and I fully intend to profit handsomely off of this situation. In short, the best gains of 2007 are yet to come!

Sincerely,