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Turn On Alternative Energy

Jennifer Openshaw

Now, if this opener sounds familiar, it's because I just used it to open another article.

That article covered alternative ways to buy oil, to effectively create your own virtual private backyard reserve. Why? To hedge against the next inevitable price spike.

Doing so now sure makes sense to me, with oil prices near a two-year low and the Saudis driving a $50-a-barrel price floor.

But buying oil isn't my topic this time. Instead, as energy prices slump, it also looks like a good chance to invest in alternative energy.

With numerous tax credits, a Democratic-controlled Congress and new California initiatives on global warming, the wind (no pun intended) should be at your back.

But like oil, in what way? Building windmills in your back yard? Planting corn in your front yard? Converting grass clippings to biodiesel? There must be better ways.

It's a challenge. Most companies in the field are in, or just beyond, the venture stage.

There are so many good ideas: fuel cells, hydrogen, solar, wind, biomass (including manure) conversion. The trick here -- and it's the same trick we learned the hard way in the dot-com boom -- is to learn to separate good businesses from good ideas.

And when we can't do that, it's time to either avoid the sector altogether or employ professionals who know what they're doing.

Like most sectors these days, there are ways to play the entire sector with funds, although at this stage only three choices exist.

Click here for the video version of this story from Jennifer Openshaw.

I don't have the space here to examine the details of each investment choice.

But I'll help by breaking the sector into subgroups and making a few comments about each. Like any investment, you must do your homework.

The major subgroups:

• Ethanol

  The booming ethanol market is the easiest to understand and has the most mature businesses. Some, such as giant Archer Daniels Midland (ADM), are poised to branch into biofuels and other biomass recovery. It's a commodity business, so stick to those with size and scale, such as Pacific Ethanol (PEIX) and VeraSun (VSE).

• Fuel cells

  Fuel cells convert hydrogen to electricity through a complicated process used mostly in stationary plants to support buildings. The technology is promising but is still in the venture stage. Ballard Power (BLDP), Distributed Energy Systems (DESC), Fuelcell Energy (FCEL) and Plug Power (PLUG) are all plays, but none have arrived as proven businesses.

• Solar energy

  I like solar a lot, but it hasn't reached the mainstream. When I can buy inexpensive plug-and-play solar equipment at Home Depot, we'll be there. Plays in this sector include Energy Conversion Devices (ENER), Evergreen Solar (ESLR) and SunPower (SPWR). Again, none are mature, but Energy Conversion Devices has been around for a while and shows some promise, having ventures in hybrid automotive technology as well.

• Geothermal

  I see this as a geographically limited niche, but there is one strong player: Ormat Technologies (ORA) is a large and fairly profitable supplier to geothermal plants with some international play.

• Methane

  Here's an intriguing one -- converting manure and other agricultural waste to methane, the principal component of natural gas. Environmental Power (EPG) has a lead in this fragrant market.

• Wind power

  Big in this field is General Electric (GE), but it's hardly a pure play. Smaller is Zoltek (ZOLT), a manufacturer of the carbon fiber blades used in windmills and wind turbines (but also not a particularly pure play).

Given the technical complexity and immaturity of this sector, you may prefer a fund. There are two conventional mutual funds and an exchange-traded fund available.

While these choices have high fees, sufficient value may lie in diversification and professional expertise deployed to build the portfolio -- fund managers have access to company managers and scientists.

• Mutual Funds: The two choices, the (NALFX)New Alternatives Fund (NALFX) and the (GAAEX)Guinness Atkinson Alternative Energy Fund (GAAEX), are not exactly household names. Costs are high -- the New Alternatives Fund has a 1.28% management fee and a 4.75% upfront load -- so a long-term commitment is required.
• ETF: The Powershares WilderHill Clean Energy ETF (PBW) may be the quickest, cheapest and "cleanest" way to play the sector. PBW follows the WilderHill Clean Energy Index, a broad basket of individual stocks, with holdings of no more than 5% in any one company. Management fees are 0.71% .

This sector is a lot like biotech 20 years ago. A lot of question marks will evolve into a few good and very timely investments. It makes sense to play the field but not overcommit to the sector or any one business.

One way or another, getting your foot in the investing door will beat buying windmills or oil wells.