Three Stock Picks in the Alternative Energy Sector (CY, ESLR, BLDP)

American Technology Research analyst Dave Edwards initiated coverage on the energy technology sector. Here's an extract from his report, with three stock picks for the sector -- Cypress Semiconductor (ticker: CY), Ballard Power (ticker: BLRD) and Evergreen Solar (ticker: ESLR):

Since the industrial revolution, technology has enabled multiple waves of economic advancement. Transportation technology took hold in the late 19th century and enabled the rapid adoption of railroads, automobiles and aircraft during the 1880s - 1920s. Information technology began commercialization in the 1960s with computer mainframes and drove corporate efficiency starting in the 1980s with PCs and related software. Starting in the 1990s, technology led a wave of consumer productivity enhancements through the development of the commercial Internet and mobile devices. Looking forward, we believe that technology will drive a similar transformation of the energy industry through advancements in renewable technologies and alternative fuels. Admittedly, we may be early in making this call, but we would rather be early than late since some of the "easiest" money is made at the early stage of each growth cycle. Note that we approach this market with historical perspective from both the alternative energy field and the tech industry. We think that combining knowledge of the space with the understanding of how technology can trigger market shifts will provide a unique perspective.

The worldwide growth in energy requirements is expected to exceed the capabilities of the current infrastructure and known fuel supplies. In the U.S., the aging electricity grid infrastructure has created a variety of capacity and reliability issues that would take many years and huge budgets to fix. The public regularly resists new power plants for "not in my backyard" reasons, and there is remarkably little progress in addressing the instability of the grid. Of course, internationally, the issues are even greater - especially in countries like China which do not have the power generation capacity to support their economic potential. While some of this demand will be met by centralized power generation using fossil fuels, much will also come from distributed power generation and alternative energy sources. In addition to these economic drivers, geo-political dynamics and environmental concerns are pushing governments to aggressively pursue new energy sources.

While there is great debate over the timing of these transitions, governments and corporations around the world today are making alternative sources of energy a top priority. Several countries have instituted incentives to encourage the development of renewable projects and capture the environmental and security benefits that those projects provide. Although the subsidies in the more mature markets are declining, new progress in the U.S. and Europe gives us confidence that the subsidies will continue. Although it is difficult to tell today, our gut says that the subsidies will be in place long enough to help sustain the market until the industry is able to reduce costs to a self-sustaining level.

We view the alternative energy industry in 2005 somewhat like the Internet industry was in 1995 -- a nascent business with a very large potential over an as yet undetermined timeframe. With so many short-term hurdles, it is easy to miss the forest for the trees, focusing on what doesn't work today rather than what will work tomorrow. While some incumbent interests are embracing these changes, others are trying to maintain the status quo. We believe there will be many new players who will drive broad changes with a variety of new technologies. Some will have clear paths to success and others will not. And, there will likely be a small number of winners and plenty of losers.

Taking a page out of the Internet investing playbook, we recommend building a core portfolio of leading companies across multiple segments rather than trying to select only one or two potential winners. Of the segments, we are focused on uncovering opportunities in solar power, fuel cells, alternative fuels and conservation technologies. While we expect to broaden our coverage over time, we have picked three companies to recommend so far. In the solar space, we recommend SunPower/Cypress Semiconductor (CY, $13.58, Buy/D. Freedman) and Evergreen Solar (ESLR, $8.45, Buy), which have strong but different technology advantages. In the fuel cell space, we recommend a swing-for-the-fences investment in Ballard Power (BLDP, $4.95, Buy) for investors with the risk appetite for a venture capital type of investment. We expect the alternative energy space will be quite volatile and a bit of a wild ride. However, over time we expect the volatility to trend towards higher "highs" and higher "lows", providing compelling returns for a well-managed portfolio.

Related:

• Other articles about the alternative energy sector from The Energy Stock Blog.
• Energy stocks mentioned in this article (clicking on a link pulls up articles for the stock in question): Cypress Semiconductor, Ballard Power, Evergreen Solar.
• The complete list of stocks covered by The Energy Stock Blog.

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