BOSTON ( TheStreet) -- Investors would have been better off owning almost any other industry besides alternative energy in the past year. High-tech solar, wind and turbine companies couldn't even beat dirty, old Big Oil.

But long-term investors have a chance to buy alternative-energy shares at attractive prices, says Les Satlow, portfolio manager at Cabot Money Management. "Green" companies such as First Solar ( FSLR) and Aixtron ( AIXG) afford advantages on their rivals, Satlow says.

Around the world, government subsidies and mandates have propped up alternative-energy companies, including stimulus-funded grants in the U.S. Evolving regulations are a risk, though unprecedented government support makes many clean-technology companies very attractive, Satlow says.
Les Satlow, portfolio manager at Cabot Money Management

"The long-term attraction to the space is that the function of government support is successful," he says. "The government is lending its near-term support to the industry to drive down marginal costs. If that's actually successful, like with the case of solar, it makes it competitive with conventional electricity production. If we even get anywhere close to that, it provides a tailwind to the industry that is potentially beyond what you can forecast or calculate."

Salem, Mass.-based Cabot Money Management oversees about $480 million in assets and focuses on growth companies, defined as those that can increase earnings faster than the overall stock market. Satlow manages the firm's Core Growth Portfolio, which is up 1.3% in 2010 and 6.8% over the past year, although both trail the benchmark Russell 1000 Growth Index.

Alternative-energy stocks haven't performed much better than traditional energy shares, based on the performance of comparative exchange traded funds. The Market Vectors Global Alternative Energy ( GEX) ETF, the PowerShares Global Clean Energy ( PBD) ETF and the iShares S&P Global Clean Energy ( ICLN) index are each down more than 10% in the past 12 months.

The Vanguard Energy ( VDE) and the Energy Select Sector SPDR ( XLE), which hold oil and gas companies, have outperformed alternative-energy ETFs. Energy as a whole is in a slump as investors are concerned that economic growth will remain sluggish. Exxon Mobil ( XOM), National Grid ( NGG), Exelon ( EXC) and FirstEnergy ( FE) are down 7% or more.

In addition to the risk of new regulations, alternative energy has several other strikes against it. Green companies rarely pay a dividend, unlike Exxon, for example, which yields 2.7%. Many also have high price-to-earnings ratios, suggesting they're overvalued. While Satlow says investors must always pay attention to valuation, he contends that these methods may not accurately portray some of these companies.

The green industry's potential is enormous, Satlow says. Still, he recommends investors be selective in their picks, while understanding that companies' businesses vary widely -- from small modules to large equipment to services.

Investors should be mindful of how each part of the alternative-energy industry has a different cycle, Satlow says. "You can't just buy the solar group because the equipment will move different than the cell makers or the module makers," he adds.

Like with most industries, the green space will offer genuinely attractive investment opportunities and failures. In this particular space, the major driver from Satlow's perspective is the regulatory one, which can become the biggest risk as well.

The most important hurdle will be the removal of subsidies, allowing companies to compete on their own in a free market, Satlow says.

For investors with a long-term horizon, Satlow offers four green stock picks his firm owns.

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American Superconductor ( AMSC)

Company Profile: American Superconductor, based in Westborough, Mass., is a power-technology company.

Green Investment Play: Wind technology

Current Price: $34.67

One-Year Stock Performance: 9.7%

Satlow's Take: "In the wind space, China is the largest consumer of wind turbines. That's a really big difference when you see how Chinese solar producers sell mostly to Europe. That's why we like to focus on the wind space. American Supercondutor is actually a play on the Chinese wind market. It licenses designs to the Chinese wind turbine producers and it is now moving outside of China by licensing to Samsung and some Indian companies. The company's major play is selling designs to Sinovel, which is China's largest wind-turbine manufacturer."

"You can't disconnect from the regulatory issues when you talk about alternative energy, but in China it is so much more favorable than in the U.S. The government is much more actively supportive of the industry than here. China is and will be the largest wind-installation market in the world."

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Aixtron ( AIXG)

Company Profile: Germany's Aixtron produces equipment for coating semiconductor materials.

Green Investment Play: LED lighting

Current Price: $31.62

One-Year Stock Performance: Little Changed

Satlow's Take: "Aixtron makes equipment that coats wafers and prepares them to be LED chips. When you look on the lighting side, the future of incandescent lighting is dark, no pun intended. In 10 years, they'll probably be illegal in most countries in the world. In our view, we're going to be moving from incandescent to compact fluorescent to LED eventually."

"LEDs are much more energy-efficient. They're one area of green energy because it consumes much less energy than conventional lighting. Right now, LEDs are primarily confined to back lighting, like in computer screens or cell phones or laptops. But within the next five years, it will move to general lighting, and that will mean street lamps in the beginning. Then it will move into commercial lighting and residential lighting eventually, which is the Holy Grail of the market."

"This is the very front end of the LED industry. They make the tools that you put the wafers into to be coated. There are concerns that orders dry up, like in the semiconductor space, which is why Aixtron has the multiple it has. But it is extremely well-run. The management team is very mature and conservative on who they take orders from. Plus, Aixtron is a technology leader in the space over its main competitor, Veeco ( VECO), which we also own."

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Company Profile: Boston-based EnerNOC provides demand-response and energy-management services.

Green Investment Play: Power-consumption management

Current Price: $30.20

One-Year Stock Performance: -6.6%

Satlow's Take: "This company is a demand-management player. They're in between the power producers and power consumers. It's fairly simple: When the grid needs power, it can meet power needs by producing more power or consuming less."

"EnerNOC essentially contracts with large power consumers to shut off some of their power consumption when it's necessary to meet demand of the grid. These industrial and commercial consumers obligate themselves to reduce their consumption during peak times. At certain peak times, like in the summer, you're going to need more power. So instead of having peak plants that are turned on, EnerNOC goes out and finds power consumers and we contract with them."

"It's a young company and it is growing very rapidly. It's a bit speculative but it's still profitable. It has a decent growth rate. But it's unproven in that it has only been profitable for a year. It has strong seasonality that, over time, will ease. Because of what it does, it's going to have third-quarter seasonality, which is something to be aware of as an investor. Utility companies are typically conservative, so it validates their business model."

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First Solar ( FSLR)

Company Profile: First Solar, based in Phoenix, Ariz., sells solar-electric-power modules using a thin-film semiconductor technology.

Green Investment Play: Solar

Current Price: $145.76

One -Year Stock Performance: -6.6%

Satlow's Take: "First Solar is the 800-pound gorilla in the solar space. It is an interesting play because the company's stated goal is to effectively be the Wal-Mart ( WMT) of thin-film solar. It was actually started by the Walton family of Wal-Mart . Even though it has been viewed as a high-margin, high-flier business, their goal is to drive down the cost of solar power. That means breaking the $1 per watt barrier. Thin-film can do that much more easier than conventional solar can. The problem, though, is a margin problem. Their margins are coming down and their EPS growth rate has come down considerably. But the volumes have not come down."

"They're moving downstream into the module business, which has much lower margins than the upstream business. The average selling prices (ASPs) are really coming down hard in this industry. That's part of the nature of the business, and it goes back to the regulatory issue. The exact purpose of the regulatory support of solar is bring down ASPs."

"Investors need to be reminded of that. If the industry is being commoditized, you have to find companies that have some sort of differentiation for long-term investment opportunities. In this case, it's volume and marginal costs. There's nobody else who even approaches First Solar in terms of the volume they're able to produce on the thin-film side. The volume will outpace the margin contraction. That has to be the precondition to long-term success."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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