Smart Energy Plays: Smart-Meter Makers

Because these companies have been public only a fewl months, not much financial data is available. These companies have yet to generate positive earnings per share, so are hard to value based on price-to-earnings multiples. While I consider these speculative stocks, I believe that over the long run this type of service will benefit from the rise in solar power as more customers will have the capability of adding electricity back to the power grid.

I consider Echelon(ELON Quote) the most speculative demand-response stock, but I believe it has the greatest short-term potential. The stock comprises 5% of the WilderHill Clean Energy ETF(PBW Quote).

Echelon specializes in automation technologies that help businesses reduce energy consumption by more effectively controlling lighting, HVACs and other energy-intensive appliances.

In an interview with TheStreet.com TV in June, Echelon's chief operating officer, Bea Yormark, said the company's product is differentiated through horizontal integration and interoperability.

That makes the applicability of the technology more universal, she said. "Because we have this whole two-way idea of communicating devices, we are able to do things that makers of vertical systems can't do. For example, in a building we can link the lights and HVAC system on the same network."

This networking angle seems to be catching on. Recently, McDonald's(MCD Quote) announced that it will be experimenting with Echelon's LonWorks technology in its restaurants. The goal is to cut costs by more efficiently managing each restaurant's energy consumption.

I expect that the biggest engine of growth will be international infrastructure applications of Echelon's technology. Its smart meters are catching on in Europe, with Austria recently announcing a pilot program. The LonWorks technology is also catching on with businesses in Asian countries such as Korea and Singapore, and even the Chinese government will begin applying the platform to street lighting systems.

For anyone who has visited China, the application of public lighting control systems is apparent when Shanghai's skyline goes dark at 11 p.m. and other city streetlights turn off into the night.

On the financial side, Echelon's income statement is less than stellar. Revenue has been shrinking as a large project in Italy gets completed, and the company has failed to turn a profit in recent quarters.

Furthermore, deferred revenue distort a clear snapshot of the company's current health. The stock's recent rally to $21 seems to be triggered by a short squeeze. Prospective investors should carefully consider whether the value of new and future contracts justify the recent increase in the stock.

Because these smaller companies have riskier financial certainty, a much safer way to play demand response is to invest in infrastructure conglomerates. Both General Electric(GE Quote) and Siemens(SI Quote) participate in the smart-meter market. The disadvantage of this approach is that the full benefit of this industry's growth will be moderated by these companies' other core businesses.

This new field of smart energy systems is still a maturing market, and the definite leaders have yet to be determined. A few of these pure-play companies may prosper, but it is also likely that some will sink and disappear. If you want to play these stocks from a speculative standpoint, I suggest taking small positions in each as a basket of stocks.