Playing a Solar Bottom

PLAY: Buy the JASO January 15 Calls (QJP AC) at market, good for the day. Place a protective stop limit at $1.70 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

Dear Bottarelli Research Member,

If you’re a member to our sister service Bottarelli Research Small Caps, then you’ll certainly remember our play on JA Solar Holdings (JASO – NASDAQ).

We originally recommended JASO shares on June 11^th 2007 for the pre-split price of $23.54. And when it came time to sell our position, we triggered a sale at $72.06, good for a very strong 206.12% return.

Since making this trade, I’ve kept a close eye on the entire solar sector, and over the last 6 months, the entire collection of solar stocks has fallen aggressively lower.

In fact, for the last 5-6 weeks, I’ve been monitoring the solar sector with a keen eye, because if we can correctly time a market bottom, we could be in for some major, major profits. Today, I’m here to tell you that the pricing floor (in terms of JASO) has now been set.

Chart-wise, JASO’s double-bottom at the $14.00 level has now set the stage for an upside run into the close of the 2008 investing year, and this offers us a phenomenal opportunity to own the JASO January 2009 calls for very attractive valuations.

But let’s back up and start from the top…

Founded in 2005 and based in the People’s Republic of China, JA Solar Holdings designs, developments, manufactures, and sells photovoltaic solar cells in China, Germany, Sweden, Spain, South Korea, and the United States.

JASO’s monocrystalline solar cells (which are made from processed silicon wafers that convert sunlight into electricity through a process known as the “photovoltaic effect”) have achieved some of the highest conversion efficiency rates in the industry. JASO’s conversion range falls between 16.0% to 16.5%, which is rather impressive considering that the highest efficiency levels ever achieved reached 17.47%.

Now as you know, solar power is one of the most rapidly growing renewable sources in the world, and the benefits are unmistakable: Reduced dependence on fossil fuels, environmental advantages, the ability to match peak time output with peak time demand, scalability, flexible locations, and governmental incentives (just to name a few).

Considering these long-term benefits, I feel that any weakness in the solar sector is nothing more than a near-term event, driven primarily by the general market direction. That’s why adding a new LEAP position on JASO makes so much sense.

You have a powerful long-term solar trend that’s temporarily been sold off due to broad-based market weakness. Over an extended time frame, JASO is a much stronger company than the current stock price indicates. For example, just look at the company’s long term agreements below, and you’ll see why buying JASO at these levels is such a compelling investment play.

• JASO currently has a major silicon wafer supply agreement with Jinglong Group, the largest producer and supplier of monocrystalline silicon wafers in China.
• JASO has a 31-month wafer supply agreement with ReneSola.
• JASO revised a 54-month wafer supply agreement with M.SETEK for 195.8 million wafers (up from their previous agreement of 111.6 million wafers).
• JASO signed a long-term sales agreement with Crown Renewable Energy in January 2007 to supply then with 45 MW of solar cells through the end of 2009.
• JASO signed a $60 million agreement in April 2007 to supply Canadian Solar with solar cells.

These long-term agreements will be the driving force behind JASO’s growth well into 2009. And when you look at their financial statements, the company looks even better.

Their Income Statement shows trailing three months revenue of $508.86 million, which comes out to quarterly revenue growth of 234.80%. They also show trailing three months gross profit of $82.38 million, good for a year-over-year increase of 155.30%.

What’s more, their Balance Sheet shows total cash of $228.08 million versus total debt of $0.00. For a rapidly growing solar company, these numbers are remarkable.

Looking at their pricing history, JASO hit a new 52-week high at $27.00 on April 21^st 2008, but has since fallen all the way down to $14.00. I must stress the fact that this pricing decline was not due to any financial or earnings shortfall. In fact, JASO has beaten Wall Street’s consensus estimate every quarter since their IPO.

The share-price weakness has been nothing more than weak market internals, and this offers us a fantastic opportunity to add JASO LEAPS to our ledger.

In terms of an upside catalyst, the company is scheduled to report earnings on Tuesday, August 12^th, and considering their impeccable track record of beating estimates, this could be the trigger that sparks the next 6-8 month rally. Therefore, let’s add longer-term JASO calls to our LEAPS ledger now.

PLAY: Buy the JASO January 15 Calls (QJP AC) at market, good for the day. Place a protective stop limit at $1.70 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

NOTE: From a market directional perspective, I expect to see one final washout selling day, and this will officially signal the market bottom. If (and when) this selling occurs, we’ll carefully add to some of our LEAPS positions. This will not only lower our cost basis, but it’ll put us in prime position to ride all of our LEAPS positions higher into the close of the 2008 calendar year. When it’s time to act on this strategy, you’ll be the first to know. But until then, here are this week’s updates.

UPDATES

UltraShort Dow30 ProShares October 65 Calls (DXD JM): We locked in a nice 24% gain on half of our positin this week, and now we’re left holding the remainder for more upside. I honestly feel like we’ll witness one final downside push before setting the market bottom, so it makes a lot of sense to maintain this position for downside protection. Sell the second half of your position at the 50% profit level.

Valero Energy January 35 Calls (VLO AG): Still one of the best turnaround plays on Wall Street, we locked in a gain on half of the position at 27.66%, and we’re now left holding the remainder for more upside. Sell the second half of your position at the 50% profit level.

Deckers Outdoor September 90 Puts (QUK UR) & Salesforce.com November 55 Puts (CRM WK): Our two additional downside put plays remain right at our break-even price. We locked in a 41.86% gain on half of our DECK puts, so let’s go ahead and lock in profits on the second half if they hit the 50% profit level. And for CRM, take half of you profits at the 50% level.

Foster Wheeler November 75 Calls (UFB KO): This week’s action in FWLT has signaled that it’s time to add to our position. From a chart perspective, I feel that the bottom has been set under the $55.00 level, offering us a great opportunity to lower our cost basis and add to our November call position. Come Monday, let’s add more calls.

PLAY: Buy more FWLT November 75 Calls (UFB KO) at market, good for the day. Adjust your first sell target at the 50% profit level accordingly.

CBOE Volatility Index October 25 Calls (VIX JE): Similar to our DXD Play, our volatility pick continues to offer us protection against any sharp downside market action. Hold.

Companhia Vale do Rio Doce January 37.5 Calls (VOH AU): As a quick note, I am recommending shares of RIO to Bottarelli Research Small Caps subscribers this week. I truly feel this is one of the most undervalued stocks on Wall Street, especially considering the blockbuster earnings reports that just came out of U.S. Steel (X – NYSE) and Arcelor Mittal (MT – NYSE). This continues to paint a bullish picture for iron ore, so maintain your RIO calls. Hold.

Overseas Shipholding Group January 95 Calls (OSG AS): OSG reported earnings this week that missed estimates by one penny. As a result, the stock experienced weakness as skittish investors dumped their shares. Despite this selling, I’d like to remain in the OSG position, as the stock could easily recover before January expiration. Hold.

Weatherford January 2009 50 Calls (WFT AJ) & Petroleo Brasileiro January 90 Calls (PMJ AR): After witnessing money flowing out of the oil and energy names last week, we’ve seen early signs that investment dollars are now starting to come back into the sector. This sparked the beginning stages of an upside recovery in both WFT and PBR, so maintain your calls for extended upside. Hold.

America Movil January 2009 70 Calls (AMX AN): Shares are quietly creeping their way back, so hopefully a continuation of this trend will help fill the gaps. Hold.

Entergy January 140 Calls (ODF AH): ETR is once again re-testing its near-term support level at $104.00. If this level holds, the stock will have established a firm bottom, paving the way for an extended upside run into January. Hold.

Hovnanian January 2010 12.50 Calls (YZX AV): The Housing Bill was passed this week, and this should offer a glimmer of hope for the homebuilding industry. Our HOV calls have maintained their profitability around the 24% level, so the next stop will be a 50% return. If these levels are reached, sell half of your position. Sell half at 50%.

Sincerely,