Suntech Power Holdings (STP – NYSE)

Dear Bottarelli Research Member,

Despite another week of turbulence, I now believe that the major market averages are trying to hammer out a bottom. As you know, Bryan and I both feel that the January lows will hold, and if they do, the next 7 months should be very interesting. With the Fed lowering rates, and the sub-prime mess finally getting put behind us, I want to be sure that we’re properly positioned to capitalize on a powerful small-cap rally. Therefore, for this week, we’re going to take advantage of a fantastic stock that’s now selling for bargain-basement levels.

Bryan and I have both been waiting for the right time to strike – and luckily the market is now giving us a remarkable opportunity to make powerful returns off this rapidly-growing company in the months ahead.

The company we’re recommending is a solar company that’s expanding in emerging markets like Korea, Belgium, Spain, Germany, and the Netherlands. With oil and natural gas continuing to set new highs, we need alternate energy now more than ever before. In fact, talk now is that oil will soon be above $110 a barrel!

Make no mistake about it, solar energy has now advanced to where it makes perfect financial and environmental sense to implement this technology on a global scale. And this company is positioned to make huge amounts of money as companies around the globe scramble to cut their energy costs.

In the building business, for example, everyone is now talking about “Green Homes.” Solar roofing (as I’ve mentioned before) is now being sought after by savvy buyers, and you can bet we’re in the very beginning stages of this massive trend. Although the home building business is very soft right now, once this cycle is over (which many of us think will be later this spring), I fully expect that many more new homes will come equipped with these solar features. Builders know they have to offer something quite different to attract buyers, so sit back for a moment and consider the solar implications if retail, warehouses, commercial projects, hospitals, and a host of other segments adopt these same ideas. I think you’ll quickly agree that solar energy is not the fad that it once was. Instead, it’s here to stay.

So this week, we’ll take advantage of a sell-off in a very well-known solar player called Suntech Power Holdings (STP – NYSE). They recently released earnings that were a bit light, and Wall Street overreacted with a dramatic sell-off. So, let’s take full advantage of this situation and buy shares of STP anywhere under $40.00.

UPDATES

DIAMONDS Put Hedge (DIA OL): It’s getting close to the time to take our DIA put hedge off the table. The re-test of the January lows that we expected to happen in February did not materialize (at least not yet), and now we’re getting close to the March expiration. Next week, use any market weakness to close off this protective put position. If need be, we’ll add more protective puts in a forthcoming small-cap alert. But for now, use any market weakness (with “market weakness” defined as a 100-point loss on the Dow) to unload this position.

Torrent Energy (TREN.OB): As you know, Torrent Energy has proven that they have coal-bed methane. A huge amount of it, in fact. Their problem right now has been establishing new financing. They recently retained investment banking firm Gordian Group, LLC to assist them in raising additional capital and reviewing strategic business alternatives. I’m not ready to abandon ship on this one, for it’s come a very long way from a pure speculation play. I think it’s just a matter of time until we hear news about a takeover or joint venture deal. Hold.

Genoil (GNOLF.OB): They recently completed the purchase of refurbished equipment for a 750-to-1,000 barrel per day commercial demonstration plant. They also announced they’ve closed their private placement at $0.66 cents a share, which is close to our buy target. This is a very nice position to be in. As we said in our original buy alert, Genoil is a bit more speculative than others, but as oil continues to move over $100, the refining of “heavy crude” is clearly going to be the next big oil trend. Owning this little gem could pay off very handsomely. Buy.

Fushi Copperweld (FSIN – NASDAQ): FSIN is the leading global manufacturer of bimetallic wire – which is used in a variety of telecommunication and power transmission products. Shares have once again pulled back, and this may be the low. The expansion of electric transmission lines in China – as well as the telecommunication build out throughout the Pacific Rim – continues be a powerful market segment. I would use any market weakness to own FSIN going forward.

Aixtron AG (AIXG – NASDAQ): They just announced an order from the Korea Advanced Nano Fab Center (KANC) for a system for solar cells. This is just one of the many vast areas AIXG is into, so I urge you to review our original buy alert from Friday, November 30^th. This is a great company on the cutting edge of valuable technology, so use any weakness to add to your position.

ISIS Pharmaceuticals (ISIS – NASDAQ): If you recall, we sold half of our position in December and locked in a really nice return. This leaves us holding the remainder of our position – which has since come down a little. But with good news continuing to flow out of ISIS, I think we’ll revisit levels above $20.00 again soon. You see, ISIS entered into an exclusive, world-wide license agreement with Teva Pharmaceuticals to develop and commercialize ATL1102 (which is a potential blockbuster used in the treatment of MS). Folks, if you do not own ISIS, I would strongly recommend that you do so. I expect a lot more upside from them as the year unwinds. Heck, if we have a Democrat in the White House, you better believe that’ll be positive for small and emerging biotech like ISIS. Buy.

On that note, I’ll hand things over to Bryan. And remember, rallies come and rallies go. But as we move into early spring, I think we’ll see more rallies than sell-offs. And when we do, we’ll be in a wonderful position to see uncommon small-cap returns.

Have a great week, and be sure to give thanks for the abundance in your life!

Sincerely,

Sunlight Falling on Earth Offers 10,000x the Amount of Energy Humankind Consumes Every Year

“I’m confident that we are not that far away from a tipping point where energy from solar will be [economically] competitive with fossil fuels.”

- Inventor and Futurist Raymond Kurzweil

I’d like to begin today’s alert by discussing the amazing accomplishments of a man named Raymond Kurzweil.

Born February 12^th of 1948, Mr. Kurzweil is described as an “inventor and a futurist.” In 1963 (at the age of fifteen) he wrote his first computer program to process statistical data at a summer job. The program was so useful that IBM distributed it to researchers.

Later in high school, he created a sophisticated pattern-recognition program that analyzed great classical music composers. The capabilities of this invention were so impressive that he was personally congratulated by President Lyndon B. Johnson during a White House ceremony.

After High School, Raymond Kurzweil went on to earn a B.S. in Computer Science and Literature in 1970 from MIT. After graduating, he started a company called Kurzweil Computer Products, which developed the first omni-font optical character recognition system (which was a computer program capable of recognizing text written in any normal font).

This technology was important because it created the first reading machine for the blind – where a computer would speak written text out loud. On January 13^th 1976, the finished product was unveiled to the National Federation of the Blind, and it was so revolutionary that Walter Cronkite used the machine (called the Kurzweil Reading Machine) to give his signature sound-off, “And that’s the way it was, January 13, 1976.”

In fact, blind musician Stevie Wonder personally purchased the first production version of the Kurzweil Reading Machine – and this began a lifelong friendship between himself and Kurzweil.

But that’s not all…

Two years later, Kurzweil sold his small computer company to Xerox, who combined his breakthrough speech recognition technology with medical records. The result was the creation of the Kurzweil VoiceMed (which is today called a Clinical Reporter) which allowed doctors to write medical reports by speaking to their computers instead of writing. And we all know how illegible a doctor’s handwriting can be!

All of these accomplishments are remarkable in their own right. But what’s even more fascinating about Raymond Kurzweil is the uncanny accuracy of his world predictions.

For example, his first book, titled The Age of Intelligent Machines, was written from 1986 to 1989, and published in 1990. In it, he correctly forecast the demise of the Soviet Union (which occurred in 1991). The basis for his prediction came thanks to new technologies like cell phones and fax machines – which (he theorized) would disempower authoritarian governments by removing state control over the flow of information.

As you know, this prediction was right on the money.

In this same book, Kurzweil also predicted the rapid improvement of computer intelligence. For example, he theorized that computer chess software would soon defeat the best human chess players in the world. And once again, this very event occurred in May of 1997, when chess World Champion Gary Kasparov was defeated by IBM’s Deep Blue computer in a well-publicized tournament.

But perhaps most significantly, Kurzweil is also credited as the first person to foresee the explosive growth in worldwide Internet usage. At the time of the publication of The Age of Intelligent Machines, there were only 2.6 million Internet users in the world. In fact, most U.S. households had never even heard of the Internet. But nevertheless, Kurzweil stated that the Internet would explode – not only in the number of users but in content as well – and eventually grant users access "to international networks of libraries, data bases, and information services." And just for good measure, Kurzweil correctly predicted that the preferred mode of Internet access would be through wireless systems, which he estimated would become practical for widespread use in the early 21^st century.

So what you have is a man who was the first to correctly predict the downfall of the Soviet Union, the growth of computer intelligence, and the global explosion of the Internet. Amazing!

Why am I telling you all of this?

Because Mr. Kurzweil’s next prediction makes a strong case for our newest small-cap pick.

Now, as an introduction to Kurzweil’s latest prediction, let me share with you one of the most powerful statistics you’ll ever read:

The total sunlight falling on earth offers 10,000 times the amount of energy that humankind consumes every year.

Isn’t that remarkable?

Keeping this in mind, in the next five years, Ray Kurzweil now predicts nano-engineered materials will transform solar energy into a viable alternative to oil and fossil fuels. These new nano-materials will make solar panels lighter, cheaper, and for more efficient at converting sunlight into electricity.

According to a new interview from LiveScience.com, Kurzweil compares engineering problems involved in solar energy to those in computer technology, where advances have proceeded at an ever-accelerating rate. But according to Kurzweil, once we perfect solar power, we’ll be energy rich – able to power our homes and make hydrogen fuel cells for our cars. In two decades, he says, solar will produce most of the energy we need.

He also says, “I’m confident that we are not that far away from a tipping point where energy from solar will be [economically] competitive with fossil fuels.”

One of the smartest minds in the world is now bullish on solar energy. That’s why it makes so much sense to use any market weakness to add a position in one of the best solar plays your investment dollars can buy.

As you know, we’ve already had great success playing solar stocks here in Bottarelli Research Small Caps.We sold JA Solar Holdings (JASO – NASDAQ) for a 206.12% gain. We also sold Solarfun Power Holdings (SOLF – NASDAQ) for a 229.42% gain. And currently, we’re holding positions in Evergreen Solar (ESLR – NASDAQ) and Canadian Solar (CSIQ – NASDAQ) which have each traded with gains of 42.39% and 48.26% respectively.

As you can see, carefully adding these high-powered solar companies to our small-cap ledger continues to hand us fantastic returns. And if you look at the recent earnings numbers coming out of this group, they show no signs of slowing down anytime soon. Case in point, just look at the solar earnings released this week!

March 4^th 2008: Trina Solar (TSL – NYSE) reported that their net income tripled to nearly $16 million ($0.62 a share) versus $4.59 million ($0.28 a share) one year ago. The Chinese solar-power company said, “During the quarter we have tripled our in-house cell production to meet our integrated capacity expansion targets and reached historical highs in our in-house cell and module efficiencies, which combined drove significant margin expansion.” On this news, TSL shares soared.

March 5^th 2008: Not to be outdone, our very own small-cap play, Canadian Solar (CSIQ – NASDAQ) also swung to a quarterly profit which beat market expectations. They just reported fourth-quarter earnings of $5.5 million ($0.20 a share) compared with a loss of $5.1 million (-$0.21 a share) one year ago. Revenue jumped five fold to $127.5 million, and as a result, CSIQ shares jumped over 16%.

This leads directly into today’s newest play on Suntech Power Holdings (STP – NYSE).

Suntech Power Holdings designs, develops, manufactures, and markets photovoltaic (PV) cells and modules. These PV cells are used in residential, commercial, industrial, and public utility applications for on-grid electricity generation. They’re also used in stand-alone lighting for street lamps, garden lamps, telecommunications relay stations, and mobile phone networks.

When it comes to top-line solar companies, STP takes the cake. In fact, not many investors realize this, but Suntech Power Holdings is about to pass Japan’s Sharp Corp. as the largest solar panel manufacturer!

With such amazing growth over the past few years, investors have gotten used to Suntech Power Holdings overachieving quarter after quarter. It became standard to expect STP to blow away their production forecasts – which helped the stock increase from $35.00 in September of 2007 to $90.00 by January of 2008.

But on February 20^th, investor expectations got out of hand. That morning, STP reported earnings of $0.29 per share for the fourth quarter versus $0.20 one year ago. Although this represented an 82% leap in revenue to $397.5 million, these results fell short of the Thomson Financial analyst forecast of $0.36.

Despite earnings for all of 2007 coming in at $1.02 per share (which was a massive increase from the $0.68 profit STP earned in 2006), shares of STP fell. And fell hard.

The primary reason for this sell-off was STP’s photovoltaic cell production capacity.

You see, instead of raising expectations (as most investors had come to expect), Suntech stuck by its initial production outlook of 530 megawatts of power to be shipped in 2008. Most analysts had projected shipments of 600 to 700 MW in 2008. But what most short-sighted investors didn’t realize was that this maneuver was actually planned by STP.

With silicon prices on the spot market nearly 30% higher than a year ago, Suntech decided to back-load their production output for this year. Silicon is the raw material used to manufacture photovoltaic cells, and in an effort to buy time until prices moderate, STP said that they would adjust their production schedule.

After all, if the spot price of silicon was to fall from the current level of about $400 per kilogram to $300, the gross margin on each solar module STP produced would jump from roughly 4% to 23%. That’s a big difference, and that’s why STP is purposely choosing to back-date their production until the second half of the year.

In an effort to preserve gross margins, STP now plans to produce 40% in the first half of the year and 60% in the second half of the year. This is a very logical move given elevated silicon prices, and it does nothing to change yearly output. Suntech is still targeting expansion of one gigawatt of capacity by the end of 2008. It’s just that 40% of this production will come in the first six months of the year and the final 60% will come later.

But upon hearing this news, investors hammered the shares. It’s a classic case of short-term expectations (and even investor greed) getting in the way of a company making a smart strategic business decision going forward. But this leads to a great opportunity. You see, after the sell-off, STP is now trading at a forward P/E ratio of 22.2, making the shares very affordable.

Not only that, but another powerful upside catalyst is Suntech’s new “Pluto” technology, designed to increase the surface area of photovoltaic cells that gets exposed to the sun’s rays. This new technology will provide a big lift to STP because they won’t have to use expensive silicon to get high efficiency levels. As a result, it’s a very cheap way for STP to increase the efficiency of each solar cell by 18% to 20%. All of STP’s new manufacturing capacities built from 2009 on are expected to be equipped with this new technology – and this should result in gross margins increasing up to 12%.

Based on this analysis, you have a situation where investors are selling STP off in the near-term – most likely with the expectation to buy it back in the second half of 2008 as their numbers ramp up again. I think that’s the wrong approach. That’s why I’d like to pick up shares now – at these depressed levels – to profit off the upside gains expected in the second half of the year.

Over the last 52-weeks, shares of STP have traded between $31.41 (set on June 8^th of 2007) and $90.00 (set on January 3^rd 2008). With prices now back down under $40.00, I think we’re picking up a fantastic company that’s poised to make a strong advance going into the second half of 2008. With an income statement that shows revenue of $1.35 billion, we’re getting a company that’s making money in one of the strongest market sectors you can buy. In fact, $8.88 in every STP share represents pure revenue. That’s quite a large proportion. Plus, amazing quarterly revenue growth of 82.5% and earnings growth of 61.10% won’t keep shares at these low levels for too much longer. Therefore, let’s go ahead and add STP to our small-cap ledger now!

PLAY: Buy shares of Suntech Power Holdings (STP – NYSE) at or under $40.00, good for the week.

Sincerely,