Genoil (GNOLF.OB)

Dear Bottarelli Research Member,

Just like that, every financial TV program is convinced that we’re in a recession. Where were they three months ago?As you know, we’ve been warning about this situation in Bottarelli Research Small Caps for quite some time, and that’s why we’ve taken the appropriate steps to A.) Properly use DIA put hedges to protect our small-cap positions, and B.) Establish positions in overseas companies that’ll withstand any U.S. slowdown without affecting their bottom lines.

In the near future, I firmly believe that we’ll begin learning that the overseas markets are not as tied to the U.S. markets as many once believed. In fact, I’m already hearing this conclusion come out of some of the most brilliant minds I follow, and that’ll put us in the perfect position to take advantage of these small and rapidly-growing companies that Bryan and I work so hard to uncover each and every week.

As I’m sure you know, we’ve seen yet another turbulent market week – and that tells me that our small-cap portfolio must once again be protected against a re-test of the January 2008 lows. Therefore, I’ve asked Bryan to offer us another cheap downside protective put hedge in this week’s alert. Please make sure that you purchase a few of these contracts next week, as they’ve offered us dynamite returns time and time again in the midst of a falling market. Having said that, I don’t feel that we’re in for a bear market all year long. In fact, many of you have asked for my yearly market forecast, so here you go:

By the end of Q3 2008, we will make an upside move that threatens the October highs of last year. That means we’ll spend Q1 hammering out a bottom, followed by Q2 confirming this low by establishing higher lows – thus setting the table for a summer rally. Therefore, let’s remain calm, and together we’ll continue picking up the very best small-cap stocks on the market for absolute bargain prices.

And on that note, I’d like to introduce this week’s pick. This company is one that I’m very familiar with, but not many investors are even aware that it exists since it trades for under $1.00 per share. These guys specialize in oil and gas technology – with a specific focus on a revolutionary bilge water treatment system that has successfully met (or exceeded) the highest guideline standards of the United States Coast Guard and the International Maritime Organization. Over the last several months, I’ve stayed up to date with the internals on this little gem, and a recent joint venture with a Chinese firm has now set the stage for establishing a new position. Since China has such a massive and unrelenting need for innovative hydrocarbon, water separation, and oil technology, this new marriage should set this play in motion for years to come.

In fact, when I first invested in this company three years ago, they were a pure speculative play – and I did quite well. But now the investing thesis has changed, which means this little company is a far better investment idea than they’ve ever been before. After all, they’re doing work on several natural gas plants in Nigeria – which proves that their technology has evolved from a strong conceptual idea into a real-life operational model. Over the last week, my charts have also confirmed that the time to buy has come, so I want us all to be properly positioned to make strong returns as this company begins to sing its song.

Make no mistake: With oil prices still holding strong at $90.00 per barrel, you better believe that every emerging country is doing everything they can to preserve their own oil and gas reserves, and that’s exactly where this little gem fits into the equation. They have the muscle, and now they have the player, to take the stock to the next level. Therefore, the time to own a position is now.

The company is called Genoil Inc. (GNOLF.OB) and I’d like to establish a position anywhere under $0.70 per share. I feel we have the chance here to make 200% to 300% before it’s over, and maybe even more. But having said that, don’t bet the farm on this one. Instead, take a small position and then sit back and let it play out.

UPDATES

SiRF Technology Holdings (SIRF – NASDAQ): The most urgent news of this week was the pounding that shares of SIRF experienced on Monday. The company reported earnings of $0.28 cents a share on revenues of $100.4 million. Analysts had expected earnings of $0.32 a share on revenues of $101 million. That means that the company missed by $0.04 per share (or the equivalent of $600,000), which resulted in a one-day drop over 50%. I consider this move to be unbelievably insane both in the size and the magnitude of this reaction. After all, SIRF has $139.4 million in cash and no debt, which means that the shares are carrying around $2.30 in net cash. Factoring out this net cash, SIRF is now valued at 0.81 times estimated 2008 revenue of $378.5 million and 0.70 times estimated revenues of $440.2 million for 2009. That, my friends, is cheaper than dirt. At these valuations, buyers will certainly step in. And heck, maybe the company will get acquired now that they’re in the 90% discount box. Therefore, I’d like us all to lower our cost basis and add to your SIFR position at these levels.

China Precision Steel (CPSL – NASDAQ): Our specialty steel play made a nice move this week, as steel in emerging markets continues to remain in play. I mentioned above that I’m bullish on small-cap stocks that offer us international exposure, and this little gem certainly falls into that category. Going forward, they’ll continue to thrive from the global demands on steel, so the shares remain a hold. I also wanted to comment to those of you who wrote me about buying the January 2009 $2.50 and $5.00 calls. Excellent trade!

Canetic Resources (CNE – NYSE): On January 11^th, CNE completed a merger, which means that they’re now a part of Penn West Energy Trust (PWE). I think this merger will serve you well so if you owned CNE, continue to hold PWE. But in terms of our small-cap positions, we will now also stop following CNE, but we’ll continue to follow trust holdings in PVX and AAV. As you know, both of these trusts are great cash cows, but by the end of this year (unless Canada changes their tax code) we’ll need to close them out. You’ll be alerted when the timing is right.

E*TRADE Financial (ETFC – NASDAQ): The key to making money is going where others are not looking, and this tactic worked perfectly on shares of ETFC. We’ll continue to offer plays like this to you here in Bottarelli Research Small Cap, so congratulations on a really great winner. And by the way, what a great Super Bowl commercial they put out!

Beacon Power (BCON – NASDAQ): I have to believe that buying this dip could be this stock’s sweet spot, simply because BCON is ready to begin using their Flywheel technology to make electricity in April or May of this year. When that news hits, you can be sure BCON will move hard to the upside, so don’t be late to the party.

Take care and have a great week.

Sincerely,

“I feel we have the chance here to make 200% to 300% before it’s over, and maybe even more.”

- Mark Blattert, February 7^th 2008

Before getting into Genoil, let’s first take yet another measure of protection by adding a new protective put position in the Dow Diamonds (DIA – AMEX). As you can see from the DIA chart below, it would appear like the DIA is in the process of establishing a higher low right underneath the 122.50 level. But in a volatile market like this, we cannot trust any technical signs, especially when the bears have been selling off any market strength for the entire 2008 calendar year. Therefore, let’s enter into a cheap form of downside protection using the DIA March 116 Puts (DI A OL).

Enter these puts anywhere under $2.30 per contract, and plan to sell then on an intra-week basis is they reach 30% above your entry price. For example, if you enter these puts on Monday morning for $2.30 and the market quickly drops 200 points, these puts could increase all the way up to $3.00 per contract. That would represent a 30% gain from your entry price, so be sure that you take this money and run!

PROTECTIVE PUT PLAY: Buy the DIA March 116 Puts (DI A OL) at or under $2.40, good for the week.

You may even consider placing a “good until cancelled” sell order 30% above your entry price right after buying these puts. That way, your sell order will execute even if you’re away from your computer when prices hit these levels. And now that we’re armed with this new protective put strategy, let’s get into GNOLF.

With a market cap of only $159.66 million, Genoil (GNOLF.OB) is a stock that’s off the radar of 99.99% of recreational and professional investors. And it’s easy to see why. With very minimal coverage, the only news flow available for Genoil on the common U.S. research sites like Yahoo Finance or CBS Marketwatch consist of company-issued press releases. Therefore, I had to broaden my research and dive into publications like Hydrocarbon Processing and OilSands Review.

Now in Canada, a magazine like OilSands Review is apparently just as popular as titles like Time and Newsweek are here in the United States. And since Genoil is currently traded on the TSX Venture Exchange in Canada as well as the Bulletin Board here in the U.S., the stock is widely known in Canada – but they’re still a relative secret on Wall Street. As a result, shares look attractive anywhere under $1.00 per share, especially since the company is quickly expanding the size and scope of their current technology.

Here’s the rundown…

First and foremost, Genoil is an international engineering and development company based in Alberta, Canada. They specialize in hydrocarbon, oil and water separation, and marine technologies for oil and gas industry. Their two most significant technological innovations include the Genoil Hydroconversion Upgrader (GHU®), which economically upgrades and significantly increases the yields of heavy crude oil and heavy refinery feedstock into light, clean transportation fuels. And the second key component of their business structure is the Crystal Sea Separator, which is their revolutionary bilge water treatment system which has successfully met (and even exceeded) the highest pollution prevention standards of the United States Coast Guard.

Here’s a full breakdown of what Genoil does and what technology products they offer in the Hydrocarbon, Oil and Water Separation, and Marine segments:

Hydrocarbon: As I alluded to above, Genoil’s Hydroconversion Upgrader is a heavy oil upgrading technology that economically upgrades and significantly increases the yields from high sulfur, acidic, heavy crude, bitumen, and refinery residues. This process results in lower capital investment and operating costs for hydro-processing today’s growing heavy crude inventories. By employing their proprietary mixing devices between hydrocarbons and hydrogen, GHU® achieves higher conversion rates at lower temperatures and pressures than traditional technologies. (This is Genoil’s most significant technology which we’ll get into more below.)

Oil and Water Separation: Genoil’s Maxis system is designed specifically for oily water treatment. Designed with durable corrosive resistant components, it uses centrifugal force to cause separation that allows inlet separations in a wide variety of emulsions without the need for heat or chemicals. This substantially reduces the overall flow volume to the oil treating system – making it suitable for a wide number of applications in the oil industry.

Marine: Genoil’s Crystal Sea Separator is a bilge water treatment system which has successfully met or exceeded the highest guidelines and standards of the United States Coast Guard for pollution prevention equipment for ship bilges.

Those three business segments make up Genoil’s business operations – and they’re quickly building up a client base that relies on these proprietary technologies. As I mentioned above, the most significant of these three technologies is Genoil’s Hydroconversion Upgrader. To fully understand how this technology works (and why it’s so important today) let me offer you a lightening-quick lesson in light versus heavy crude oil.

Light crude oil has low wax content. Since crude oils with high viscosities are more difficult to transport and pump, those with lighter wax content are referred to as “light crude” and the ones with substantially more wax are classified as “heavy crude.” As you can imagine, light crude oil is the most desirable oil. But as our global oil supplies are continually diminishing, there will be a day when this preferable light crude no longer exists. Therefore, there is an urgent need for a cost-effective process for reducing the viscosity and removing any additional contaminants from heavy crude oil. And from Genoil’s perspective, the process of eliminating sulfur and other contaminants from heavy crude to make up for the shortfall of light crude is now a critical global need.

You see, many oil-rich countries have held back on producing their heavy crude while they process their easily-accessible light crude. But now (and most certainly in years to come) the perpetual declines in light crude will lead directly to increased production of heavy crude. And as a result, this shift from light to heavy crude production will make Genoil’s technology extremely relevant on a global scale.

In fact, many refineries were built solely to operate on much lighter crude, which means they cannot handle sour heavy crude. Therefore, the idea of successfully removing sulfur and other contaminants contained in heavy crude in a way that can be used in existing refineries is incredible news.

By applying GHU’s technology, a refinery can get more production out of every barrel of oil. In fact, some statistics show that the unused residue portion of every oil barrel is reduced by 80%. That’s the allure of Genoil’s GHU technology. And since Genoil has been awarded a U.S. patent (and is awaiting its Canadian patent), you know that this technology is solely theirs.

With so much promise, why is GNOLF only trading for $0.70 per share?

First and foremost, the stock is still in its infancy stages of growth. As Mark mentioned above, he has been investing in Genoil over the past few years. And during this time, the stock was nothing more than pure speculation. Back in 2001, for example, Genoil first built a mini-upgrader in Two Hills, Alberta to begin testing its technology on various crude oil assays. Now fast forward to October of last year. Genoil and Hebei Zhongjie Petrochemical Group of China signed a letter of intent to build (what they say will be) the first major heavy oil hydroconversion upgrader in China. Hebei Zhongjie Petrochemical Group has put up $20 million, and a third party will provide the balance of the $100 million needed to build the equipment and technology – making Genoil’s investment proposition much stronger. In other words, Genoil now has a financial backer for their technology – and this is the all-important first step to ramping up their business operations on a large scale.

The next step in the partnership with Hebei Zhongjie is to complete the front-end engineering and design study. This step has a target start-up date of early 2010. Therefore, we have a strong upside catalyst that should push the shares over the next 12 to 18 months. And in addition to this China deal, GNOLF also has two more milestones that could push their shares higher over the next 24 months.

First off, they have a Memorandum of Understanding in place for a refinery in Romania to install a 1,500-barrel a day General Hydroconversion Unit. They also have several clients interested in their Crystal Sea technology, which GNOLF is now aggressively marketing to several major big shipping companies. Over the next 12 months, they anticipate getting two or three of their Crystal Sea units onboard these ships. After all, ship owners have until 2009 to start meeting new compliance standards – and this drives the need for GNOLF’s Crystal Sea technology. Of course, GNOLF will benefit if any ships adopt this technology going forward. As it stands today, the current stock price reflects no deals.

They’ve also formed a strategic alliance with Aquamation. This arrangement is a true joint venture for industrial water treatment, which calls for GNOLF to supply the engineering, equipment, and technology for two natural gas metering projects in Nigeria.

So just like that, Genoil has moved from a company with a strong conceptual technology to a company that’s in the beginning stages of marketing their technology to a number of global clients. Add in to the equation the allure of refining heavy crude in a cost effective manner, and you have a strong company in the infancy stages of powerful growth.

With a market cap of only $159.66 million and a share price under $0.70, Genoil has minimal downside risk and substantial upside potential. Furthermore, the fact that the stock has been so incredibly strong in the month of January 2008 (where virtually every other stock on Wall Street was pummeled) shows you that GNOLF has a lot of bite to go alongside with its bark. As the company continues to structure and develop their technologies in China, Nigeria, and Romania, the stock will continue to see upward pricing strength. Therefore, let’s go ahead and add a small position to our small-cap ledger now!

PLAY: Buy shares of Genoil (GNOLF.OB) at or under $0.80, good for the week.

Sincerely,