Canadian Solar (CSIQ – Nasdaq)

Dear Bottarelli Research Member,

The markets continue to sell off. In fact, the beginning of the 2008 calendar year may go down as the worst beginning to a new trading year in history. The NASDAQ, for example, is already down 12% on the year. The Dow is off 7% as well. That’s quite a bearish start — and that’s exactly why Bryan and I recommended holding the protective position on the DIA February 128 Puts (DAW NX). As you know, we entered this protective put position on Monday for $4.10, and these puts have already traded as high as $7.35. That’s a 79.2% gain in one week! As we mentioned when we issued this play, you should have been locking in half of your profits on this downside weakness, so congratulations on a very nice winner! Continue to watch this position and take your gains accordingly. After all, the “Head and Shoulders” formation that’s now present on the Dow’s weekly chart indicates that the markets could move even lower, so be sure that you use any forthcoming weakness to lock in more DIA put gains!

Now, as I mentioned last week, we must remain calm in the midst of this bearishness. One thing that I always try to do with my personal trading is to never get too excited about the highs — and never get too worried about the lows. After all, Wall Street tends to over-emphasize both aspects of the market (highs and lows) and this always leads to unnecessary levels of both euphoria and misery among the mainstream investor. In my experience, these extreme emotional swings have never lead to successful trading, so let’s remain humble and clear-sighted. This is not the first time I have lived through similar times, and now is where experience is more important than ever. Trust me, this mindset will prove to be tremendously beneficial when we look back six months from now and re-read this commentary.

Having said that, it certainly does infuriate me that the FED will not acknowledge the fact that we’re now in a recession. For this very reason, Bryan and I have gone to great lengths to give our small-cap portfolio an international bias. After all, I’m more worried about a U.S. slowdown than any slowdowns in China, India, Russia, Brazil (or the entire grouping of Asian countries), so investors like us must be nimble and move into areas where growth is ample and profitable. Right now, the companies that fit this description are those with a majority of their sales linked outside of the United States. And today, we’ll continue this theme with our newest pick. So let’s all roll up our selves, dig in, and work together as an inner circle should.

Many of you are brilliant traders, and that’s why you’re part of our Bottarelli Research Small Cap group. So keep this in mind: Bryan and I value your money as if it was our own. When I see the market turmoil battering some of the very best solar plays on the market, I must stand up and take notice.

In fact, after seeing the massive sell-off in the solar sector, Bryan and I have decided to dip a toe into the water. After all, this sector is going to continue their leadership position well into 2008, and the key opportunity here is to buy while everyone is panicking and running for the exits. As you know, we’ve hit home-runs with both JASO and SOLF, but I’ve now uncovered yet another little company about to strike it big. They’re a very well-run company with years of being in the solar business, and they’re able to produce solar products at much less costs than others. This will be a huge benefit going forward.

Not only that, but the company is supported by several top executives from the petroleum, petrochemical, semiconductor and electronics industries — and they have a major operational presence in Taiwan. As I’ve mentioned in previous small-cap bulletins, I think Taiwan is going to be one of the bright spots around the globe this year, and their exposure in Taiwan will prove to be a big plus. They’ve also positioned themselves to take full advantage of the New China Clean Energy Laws taking place. Make no mistake about it, this company (in conjunction with our current position in ESLR) could be one of the single best solar companies for us to own.

Just this past year, they struck deals with German City Solar Group to deliver 60MW of solar modules for a solar power station in Spain — and these shipments are expected to get delivered this month. Add to that agreements with China Sunergy and Gintech Energy of Taiwan (which are both expected to begin delivery this month) and this company is really in the verge of serious upside momentum.

Out of all the solar plays that Bryan and I watch, we both feel that taking a small nibble here could really pay off. After all, the stock has been cut in half from it’s highs, and they’re getting set to report earnings on March 5^th 2008. Since most momentum stocks like this tend to rally in advance of their earnings release, the play here is to establish a position now and ride the upside push leading up to their announcement.

The company is called Canadian Solar (CSIQ – NASDAQ) and let’s enter a small position under $18.50 per share. Bryan will expand on the full trading tactic below, but first I have some position updates I’d like to share.

UPDATES

Puda Coal (PUDC.OB): It makes no sense to me why this stock has been such an underperformer, so I’m officially putting it on my “short leash.” If coal is the way China fuels its thirst for steel and electricity, then PUDC should be reflecting this major demand in the form of upward stock price appreciation. But as you know, the company just can’t get any upside momentum, so I’m giving it a little more time before selling and moving on.

Aixtron AG (AIXG – NASDAQ): Aixtron is a well-blended company, and if we see any sort of technology rebound in early 2008, then AIXG will be a large beneficiary. As you know, the stock has pulled back alongside the rest of the markets, and this offers everyone an opportunity to add AIXG to their small-cap ledger. If you have yet to own any shares, now would be a good time to enter a small position. Please read our initial alert from Friday, November 30^th for complete details.

China Precision Steel (CPSL – NASDAQ): Though down from our original buy price, this niche market steel maker is executing it’s strategy perfectly — and therefore the investment thesis remains very strong. You see, CPSL is expanding into overseas markets such as Nigeria, Thailand, Indonesia and the Philippines, and they also intend to move into Japan, the European Union, and the United States. These moves should really fuel CPSL’s upside growth potential going forward. If you do not yet own any shares of CPSL, I would use this quiet time to establish a position.

General Moly (GMO – AMEX): This has been one of our biggest gainers of 2007, and folks, the story just keeps getting better and better! This is one of those companies that you can tuck away and check weekly. In fact, I had one reader already tell me that they are going to fund their children’s educations off their GMO profits. Congrats! Be sure that you’ve taken your seed money off the table and enjoy your free ride. I continue to expect great things in 2008.

Metalline Mining (MMG – AMEX): In past small-cap alerts, I’ve been mentioning my opinion on silver, and bingo! We nailed it. If you recall, MMG is a silver and zinc play with a huge zinc discovery at Sierra Mojada. In November of 2007, they announced one of highest grade silver intersections I’ve ever seen. As you would expect, I stay in close contact with MMG’s management, and just last Friday I received an e-mail which I will share with you below:

Mark, We are due for a project progress update. We have a board meeting on January 18th and will have an update out shortly thereafter. Analytical results from Chemex, that were delivered for over 2 months ago, are just starting to come in. Drills are turning and our analytical lab is up and running, it will probably take a few weeks to tune it and the crew up to standards. We now control our own destiny. Our first priority remains the oxide zinc feasibility study and second is to evaluate the silver, copper mineralization. Thanks for your inquiry and support.

I cannot emphasize this investment thesis enough. MMG’s stock price has their zinc priced into the current valuation — but it has yet to account for any of their silver. To me, that’s like getting silver for free. Based on what I shared with you above, I expect to hear some very good news — and soon. We’ve already made our first 100% and now we have more news on the horizon. It just doesn’t get any better than this. MMG is a buy.

Evergreen Solar (ESLR – NASDAQ): Like most solar plays (noted in my opening above), ESLR has been taking it on the chin. That’s why it’s always a smart idea to lock in gains on half of your position the moment you achieve gains above the 40% profit level. This tactic allows you take profits with one hand and continue holding half of your stock in the other — setting up a nice opportunity for you to add to your position on any pullbacks. Also, don’t forget why we own ESLR. Their String Ribbon technology uses significantly less silicon than conventional approaches, making it a great stock moving forward. Once the markets shake out, the solar industry will climb once again, making ESLR an excellent solar play in 2008.

Basin Water (BWTR – NASDAQ): This is our water and technology turnaround play. I’ve covered BWTR in depth before, so I won’t waste too much time on it today. But don’t be surprised if the market stabilizes and this growth story really starts to unfold. Water is a commodity and we all need it, so if you are interested in taking a small position, use this market weakness as your friend.

On that note, I’ll turn it over to Bryan for his thoughts on this week’s pick. Until we talk next week, stay calm and stay focused. There are many great investment opportunities starting to appear at bargain prices, and Bryan and I will be here to help you take full advantage of the very best ones. Have a good week.

Sincerely,

“Sector Dips are Not an Indication of Long-Term Weakness for the Solar-Power Market”

- Associated Press, Thursday, January 17^th 2008

Before making the case for adding shares of Canadian Solar (CSIQ – NASDAQ) to our small-cap ledger, let’s take a moment to review our three previous small-cap solar recommendations.

The first was JA Solar Holdings (JASO – NASDAQ), which we recommended on 6/11/2007 for $23.54 per share. This was a pure play on a global polysilicon supply shortage, and we sold JASO for $72.06, good for a 206.12% gainer.

The second was Solarfun Power Holdings (SOLF – NASDAQ), which we recommended on 7/9/2007 for $11.49 per share. This was our follow-up play on solar polysilicon, and we sold SOLF for $37.85, good for an even better 229.42% gainer.

And most recently was Evergreen Solar (ESLR – NASDAQ), which we recommended on 11/19/2007 for $13.07 per share. This was our play on ESLR’s powerful and proprietary String Ribbon solar technology, which has traded as high as $18.61 since our original entry. As of today, we are still holding this position.

As you can see, solar was undoubtedly the hottest investment sector in 2007, and after a sizable pullback, Mark and I both feel we’ll see the solar sector pop once again in the coming months. Therefore, the time is right to enter a small position in CSIQ.

Now don’t let their name fool you. Founded in 2001 and headquartered in Markham, Canada, Canadian Solar does not operate solely in Canada. In stark contrast, they offer solar products to customers located around the globe, including Germany, Spain, Canada, China, Japan, and the United States. And as you can probably guess, CSIQ designs and produces solar modules that convert sunlight into electricity for residential, commercial, and industrial solar power generation systems. But more specifically, Canadian Solar’s two major product lines are as follows:

Their first product line includes a standard range of poly-crystalline and mono-crystalline solar cells (5W to 300W), which CSIQ offers to various distributors and system integrators.

Their second product line includes custom-engineered solar specialty products, which are designed and manufactured based on the customers’ specific requirements.

Once these customers receive the cells from CSIQ, they integrate the solar modules into their own products and sell them as part of their own product portfolio. For example, one of CSIQ’s specialty solar modules is used to power bus stop lighting. Other examples include the following:

Solar-Powered Car Battery Charger: CSIQ has developed and manufactured a solar storage battery charger for one of the top five automobile manufacturers in the world.

GPS System: CSIQ has developed and manufactured a solar power product for a GPS system used in land transportation and ocean shipping.

LED Lighting: CSIQ is involved in manufacturing LED lights used in marine, aviation, and public transit systems.

Thanks to their weatherproof sealing, CSIQ’s specialty solar panels guarantee excellent durability under harsh outdoor conditions. Plus, their self-supporting anodized aluminum frame is designed to allow easy mounting and carrying.

Not only that, but as an off-shoot to their specialty solar panel segment, CSIQ also implements solar power development projects in conjunction with government organizations to provide solar power generation. For example, one such project is already up and running — which provides power to rural areas in the People’s Republic of China. CSIQ has also built a 10 KW grid-connected Solar Power Station in China which consists of forty 160-watt multi-crystalline solar modules and twenty 160 watt mono-crystalline modules, each of which are connected to an electrical grid.

And they also operate one of the largest silicon “reclaiming” business centers in the world, which involves purchasing, processing, and supplying ingots, pot scraps, broken wafers, reclaimed wafers, and broken cells

And to be honest, that’s the core of their entire operation. But that’s all the company needs to sustain eye-popping growth over the next few years. In fact, their 5-year growth rate currently stands at a whopping 37%. That’s huge. But it’s just the beginning. Get this:

Their year-over-year quarterly revenue growth stands at 447.40%, and their year-over-year quarterly earnings growth stands at 118.40%. Once again, these are blockbuster numbers. No wonder the stock has gained 91% over the last 52-week compared to the S&P 500’s 52-week loss of 3.56%!

Now, with such impressive figures comes wild price swings. For example, the stock hit a new 52-week low of $6.50 per share on August 16^th 2007. But four months later, the stock hit a new 52-week high of $31.44 on December 26^th. That’s a 384% price swing in four short months! With such tremendous upside potential, that’s exactly why I’d like to take a shot a buying some CSIQ stock at current levels.

As you can see from the chart, the stock is getting into oversold territory well above its 200-day moving average — and this is a strong sign that the stock has a nice base of buying interest well above this critical level. If the stock can pop back above its 50-day moving average (which Mark and I both feel that it can) then you’ll most likely see a move back up to its 52-week high at $30.00 leading into their March earnings announcement.

And remember, all signs point to a blowout quarter. After all, their Q3 2007 net revenues increased to $97.4 million compared to $17.8 million in Q3 2006 and $60.4 million in Q2 2007. That means Q3 net revenues increased 447% over last year and 61% over last quarter!

Going into their Q4 2007 conference call (which is scheduled to start Wednesday, March 5^th at 8:00 AM EST) their net revenues are expected to be $110 to $120 million. Shipments for the fourth quarter of 2007 expected to be approximately 35 MW.

Because of CSIQ’s order backlog and production capacity, they’ve already increased their full-year net revenue guidance to $285 to $295 million. That’s a 325% increase over full-year 2006! And based on current customer orders, net revenues for 2008 are expected to be $650 to $750 million. That’s another 154% above 2007 levels. Blockbuster! And since CSIQ believes that they’ve contractually secured 90% of their silicon or cell requirements to support module production in 2008, these numbers look pretty accurate and achievable.

With that backdrop, the play here is to get positioned in CSIQ now and catch the run-up leading into their March 5^th earnings announcement. That means we buy at today’s depressed stock valuations, and we use any upside movements to lock in half of our profits at the 25% to 45% mark. Then, we continue to hold the second half of our position into their earnings report in anticipation of the stock blasting aggressively higher on strong results.

Remember: In today’s market, we must be agile and continually lock in profits on half of our position the moment our gain targets are recognized. This play is no exception. Similar to our DIA puts, the play and full strategy are outlined for you below:

PLAY: Buy shares of Canadian Solar (CSIQ – NASDAQ) at or under $18.50, good for the week.

STRATEGY: Look to sell HALF of your position anywhere between $22.50 and $25.00 per share leading into their March 5^th earnings report. Hold the second half of your shares for this report, and look to complete the trade by selling your remaining position into any earnings-related strength.

Sincerely,