With the price of oil soaring and the Fukushima nuclear accident dominating the news, investors have been flocking into alternative stocks, giving them a big pop. First Solar (NASDAQ:FSLR) is up close to 40 percent since last year, and 12 percent since the Fukushima accident; LDK Solar (NYSE:LDK) has almost doubled since last July. But there is a better way to play the rising oil prices and the nuclear energy fear: The smart grid.
A smart grid is an electricity network that applies digital technology to monitor and regulate the demand for, and the supply of, electricity. Network infrastructure products from Echelon Corporation (NASDAQ:ELON), for instance, connect everyday appliances, such as air conditioners, with thermostats and electric meters, allowing both utility companies and customers to monitor and adjust energy demand from remote locations. Smart meters from Itron (NASDAQ:ITRI) and Echelon allow utility companies to distribute efficiently and effectively electricity produced by alternative energy companies.
Smart Grid versus Alternative Energy
Company Recent Price P/E
Smart Grid Companies
ELON 8.80 N/A
Itron Inc. (ITRI) 54.27 21.25
Digi Intl. (DGII) 10.45 26.02
Comverge (NASDAQ:COMV) 4.77 N/A
EnerNOC (NASDAQ:ENOC) 19.92 53.81
Alternative Energy Companies
FSLR 157.13 20.46
LDK 12.08 12.01
In contrast to alternative energy stocks, investors have been shunning smart grid stocks, driving their prices lower. Itron and Echelon are down 20 percent and 10 percent, respectively, from a year ago. And although they do not command better valuations than alternative energy stocks, they are a better play, as grid stocks ride two trends at once: The smart energy consumption management and the smart energy distribution management.
Most smart grid companies have been around for a long time, but the conditions for their advanced technologies weren’t ripe. Consumers and utility companies found smart devices too expensive to replace traditional energy management devices. Why pay for a new electric meter, when the old does the job? This can explain both the slow adoption rates and the erratic performance of smart grid stocks. Echelon Corporation’s smart meters, for instance, have been around since the late 1990s, but very few utilities could afford to adopt them. One of them, Italy's Enel (EN), gave a big boost to Echelon’s stock, from $18 to $140 -- but others didn’t follow, driving the stock down to the $10 range.
The soaring price of oil and government mandates that require utilities to purchase electricity from alternative providers has been a tailwind for smart grid. Saving a gallon of oil makes a big difference when it costs $4 rather than $1. Complying with government mandates requires the sophisticated technology that smart grid companies have -- and that’s what makes investing in these companies a timely bet.
Disclosure: I am long ELON.