Huaneng Power International (HNP – NYSE)

Dear Bottarelli Research Member,

For the second week in a row, I’m leading off with the same question:

“Is the bottom in?”

This past week, we saw the Fed step up to the plate and offer homebuilders and banks the help that they desperately need — and you better believe that these corrective actions will be a huge relief for the global economy. More importantly, this is a true sign that the U.S. markets are moving towards recovery.

Another thing that caught my attention was the fact that banks (like UBS) reported billions in new write-offs, and yet their stock prices rallied! This is a sign for which both Bryan and I watch. When bad news is ignored and stocks actually rally on poor news, it tells you that the “worst is over” mentality is now present in the marketplace. This is another bottom indicator.

Therefore, I will stick to the mid-April market rebound prediction that I’ve been making in the last few small-cap alerts. And to fully capitalize on this situation, we’ll continue picking up the market’s very best small-cap stocks at severely discounted prices.

For this week’s pick, we’ll once again travel abroad and focus on a company that I have been watching for many months. Just like our recent plays on STP and SNCR, we’ll take advantage of the market turbulence and scoop up shares of a very well-positioned energy company on the cheap.

More specifically, this company is involved in power generation in China — and they practically dominate the market. Let’s face it, the growth in China’s population is massive — and the daily need for electricity will remain quite substantial for many, many years. Not only that, but as China’s industrial infrastructure continues to get built up (or upgraded), this will obviously drive increasing demand for power as well. This further strengthens the bullish thesis for today’s new pick.

This company’s main production comes from coal fired plants, and we all know that coal is the least expensive way to produce electricity. China has been finding and developing new coal fields as quickly as they can to meet their energy demand, but this company doesn’t stop there. They’re also on the cutting edge of developing “green energy” alternatives in China, which include hydroelectric, thermal, and gas-fired plants. They also produce electricity in Singapore, which is a very fast growing area by itself.

All told, this gem is capable of producing 33,723 MW of electricity. Folks, that’s a lot of juice. But what impressed me the most about this company was the fact that they were able to deliver higher profits even as coal prices shot up over the past year. Make no mistake about it, the major “Industrial Boom” taking place in China will continue driving explosive power demand — and this fact alone explains why today’s small-cap play fits in our portfolio like a glove. It’s a pure play on power in China, and it doesn’t get any simpler than that. And now that the stock has come well off its highs (it’s just coming off its yearly lows, in fact), Bryan and I both feel that this is an excellent chance to pick up a small and growing company offering many years of powerful growth — all at a discount at current prices.

This week’s pick is Huaneng Power International (HNP – NYSE) and let’s establish a position as it finds support at $33.50 per share. As the stock is now coming off the lows of $25.00, I firmly believe this gem will hand us some powerful profits throughout 2008.

UPDATES

Graham (GHM – AMEX): As you can see below, shares of our vacuum and heat transfer technology company blasted off on Thursday after reporting that their Q4 orders increased 32% year over year. This increase prompted the company to increase their fiscal year 2009 revenue grow by 15% to 20%, as significant orders were received from Saudi Arabia, China, Canada, and the United States. According to Graham’s President and Chief Executive Officer James R. Lines, “We had exceptionally strong bookings in the fourth quarter.” That’s an understatement! Continue to hold GHM for more gains!

Interoil (IOC – AMEX): Over the weekend, a report came out about IOC needing to restructure it’s financing with Merrill Lynch. This is something many companies go through these days — but let’s not lose sight of the fact that both T. Boone Pickens and Merrill Lynch have sizable stakes in IOC. With these powerful backers, I’m sure they’ll do whatever it takes to support their positions. I’ll keep a very close eye on this situation, but until we have more information, continue to hold IOC.

Suntech Power Holdings (STP – NYSE): We timed the bottom perfectly! If you bought off the lows under $33.00, then you have done quite well. With shares of STP hitting a high of $49.48 this week, that’s a 47.79% gain from our March 10^th entry point. Boy do we love this company! If you see your return reach 50% in the coming weeks, take half of your profits off the table and hold the remainder for more upside.

Canadian Solar (CSIQ – NASDAQ): Once again, we have seen some great profits in hand. Based on our $15.85 entry price from January 22^nd, this week’s high of $25.99 officially gives us a 63.97% return! Therefore, let’s go ahead and lock in half of our profits now — and then hold the remaining half of your position for more gains.

Congratulations on your winners this week!

These strong returns tell me that the small-cap sector is starting to turn the corner — and as this trend continues, we’ll remain in perfect position to lock in many more gainers along the way. Our patience seems to be paying off, so on that note, I’ll hand things over to Bryan. Have a good week, and remember to give thanks for the abundance in your life.

Sincerely,

Has the RUT Signaled a Bottom?

Successful Double-Bottom Test in March Signals “Yes!”

Mark begins his commentary above by asking a critical question:

“Is the bottom in?”

When you study the major market averages (like the Dow, S&P, and NASDAQ), the answer to this question remains debatable.

But when you look at the chart of the Russell 2000 Small Cap Index (RUT), I feel the answer is crystal clear. As you can see below, the RUT has established a double-bottom formation by testing (and successfully defending) the 640 level on two separate occasions in March.

This tells you an important piece of information.

Small-cap stocks are now signaling that they’ve hit a bottom — and that’s why I’m very excited about all of our current small-cap holdings. On a historic basis, small-cap stocks tend to be the group that leads the markets higher (taken in context that small caps always out-perform large caps). Now I’m seeing the early indication that the RUT is poised to move higher — and this is very exciting news. After all, a bottom on the RUT means that all of the high-quality small-cap names that we’ve been accumulating over the last 12 months will soon turn the corner and move higher. So on that positive note, let’s dive into today’s newest small-cap pick: Huaneng Power International (HNP – NYSE).

Huaneng Power develops, constructs, operates, and manages thermal power plants in China. In fact, they’re China’s largest electricity provider, with full ownership of 17 operating power plants in Liaoning, Hebei, Shanxi, Shandong, Henan, Fujian, Jiangsu, Zhejiang, Guangdong, Jiangxi, Gansu, and Hunan (plus interests in Shanghai and Chongqing municipalities). They also have controlling interests in 12 other power companies and minority interests in 5 operating power plants. The map below shows the 28 service areas represented by HNP’s operations.

As you can see, all of their locations are alongside China’s coastline, which is where the highest-density of China’s population lives. The coastline is also where most of China’s new infrastructure and development is occurring.

But before going any further, let’s take a step back and review some important facts about China.

• For the past quarter of a century, China has been the fastest-growing major nation, with an average annual GDP growth rate above 10%.
• 20% of the world’s population lives within China’s borders — and the economy of the People’s Republic of China is the second largest in the world (after the U.S.) with a GDP of $10.21 trillion.
• China’s per capita income has grown at an average annual rate of more than 8% over the last three decades (drastically reducing poverty).
• In 2003, China surpassed Japan to become the second-largest consumer of primary energy (after the United States).

Considering China’s size and their abundance of resources, it’s easy to understand why their energy production has grown dramatically since 1980. But despite the fact that China’s electric-generating capacity has grown rapidly, it still continues to fall considerably short of demand.

After all, the geographical distribution of China’s energy shows that most of their resources are located far away from their major industrial users. For example, China’s northeast is rich in coal and oil, China’s central region is abundant coal, and China’s southwest region has immense hydroelectric potential.

But the problem lies in the fact that China’s major industrialized regions (which are located around the Guangzhou and the Lower Yangtze region in Shanghai) face a major energy supply imbalance because they’re not located near any of China’s major energy resources.

That’s why coal provides 75% of China’s energy consumption. The other 17% is generated by hydroelectric installations and the remaining 4 — 5% comes from two nuclear energy plants located in Guangdong and Zhejiang.

Based on the fact that coal provides 75% of China’s energy consumption — and HNP is China’s largest energy producer — you would think that HNP would be shooting aggressively higher. But that’s not the case, and this presents us with today’s investment opportunity. You see, HNP’s recent stock weakness is attributed to (what I’m calling) confusion surrounding their March 25^th earnings report.

Here’s what happened…

Despite rising coal prices, HNP reported that their full-year profit rose 1.5% on a double-digit jump in revenues. But despite their yearly profits increasing, investors did not like the fact that their second-half earnings dropped 16% (due to rising coal prices). HNP reported earnings of 3.3 billion yuan for the second half of 2007 vs. analysts’ estimates of 3.6 billion yuan, and this short-fall triggered a sell-off in the stock.

For a number of reasons, I see this weakness as a prime buying opportunity.

First off, the growing demand for power in China will continue to be a steady driver of growth in HNP for years to come. Second, the recent sell-off now has shares of HNP trading at an attractive trailing P/E of 11.26 and a price/sales of 1.33. As investors realize that they can own China’s largest electricity provider for these attractive valuations, you should see share price appreciation throughout the 2008 year. In addition, HNP also pays a generous forward annual dividend yield of 5.30%, making the investment thesis even stronger.

Not only that, but in terms of new construction projects, HNP has six new developments in the works, all either complete or expected to be complete by 2009. Every one of them should help to grow revenues at a nice clip.

By the end of 2010, HNP management says that all of their power plants will become environmental friendly and energy efficient.

As you can see from the HNP chart, the stock makes large price sweeps — both up and down. For example, shares hit a new 52-week high of $57.50 on October 17^th 2007 and they also hit a new 52-week low of $24.00 on March 17^th 2008. With shares currently trading for $32.35, I’d like to use the recent weakness (and subsequent recovery) to play a long-standing upside move in HNP. Therefore, let’s go ahead and add shares to our small-cap ledger now!

PLAY: Buy shares of Huaneng Power International (HNP – NYSE) at or under $33.50, good for the week.

Sincerely,