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Investing in renewable energy stocks seldom fails to be exciting - it can lead to crushing losses as well as mouthwatering gains. (Think ethanol stocks and thin film solar in 2007.) With this in mind, I usually emphasize that the majority of most investors' portfolios should be targeted towards larger, more profitable companies, especially those focused on energy efficiency rather than the more sexy renewable energy technologies.

This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies that aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulate greenhouse gas emissions. That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolio, so long as those stocks are not overly correlated to the portfolio as a whole.

Others just like to gamble. Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar (NASDAQ:FSLR) is up by a factor of ten in 2007), it's a safe bet that this alternative energy has drawn more than our share of gamblers.

This article is for the gamblers (and a little bit for the cautious diversifiers). If you're a gambler, these are the gambles I would be taking. If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent of your portfolio).

In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.

Some Educated Hunches

Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good. I feel this is the wrong approach. Emotional investing is a sure-fire way to stack the odds against yourself. Even in risky assets, there are good bets and bad ones.

Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired. Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.

My favorite gambles therefore, are stocks I think have the potential to be tomorrow's feel-good fad, currently being ignored. I call this gambling because it has very little or nothing to do with the underlying fundamentals, and a lot more to do with wild emotional swings of the retail investor. While it is gambling, it has more in common with card-counting, than with slot machines.

Ten Gambles for 2008

I personally am more of a cautious diversifier than a gambler, but I do have some gambler in me. All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios. I don't see this as play money, but at the same time, I know that any of these gambles could turn against us unexpectedly, and I keep the positions accordingly small. In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)

#10 and #9: Cree, Inc. (NASDAQ:CREE), and Lighting Science Group (LSGP.OB).

I've been invested in both of these for a long time, and last wrote about these LED stocks in June. I sold half the holdings of many of my managed accounts soon after that article when CREE was around $27-$30, about double the price at which I'd bought them. Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.

Yet the fundamental reasons to be bullish about LEDs are stronger than ever. This Christmas season was the season of LEDs in more ways than one. In my personal experience, I went to Target (NYSE:TGT) on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.) I left empty handed, but I expect that Philips (NYSE:PHG) (another holding), will report LED sales well above expectations this quarter.

Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014. Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge. It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration. Thus, the new law provides a practically guaranteed, large market.

I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Times Square on New Year's Eve. Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.

For hard-core speculators, one LED penny stock that you might look at is Cyberlux [CYBL.OB.] Cyberlux was brought to my attention by a reader the last time I wrote about LEDs. I looked into it again last week, but decided not to invest because of the large overhang of convertible debt. In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles. That does not mean that short term traders might not make a killing (or lose their shirts.) For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.) There's a lot of information there, although I don't know if its accurate.

#8 Maxwell Technologies (NASDAQ:MXWL)

Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications. Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.

They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles. Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries. Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.

The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap. I find patent-infringement suits to be very unpredictable. Maxwell filed the initial complaint in October 2006, and NessCap countersued in December. A large negative earnings surprise last June and subsequent analyst downgrades further depressed the stock, possibly aggravated by tax-loss selling. I see a good chance of a quick rebound in 2008, especially if the courts start ruling in favor of Maxwell, or the two companies reach a settlement. While a negative ruling would hurt, it would be unlikely to destroy the company.

Maxwell's top-line revenue has been flat for over a year, so a large part of the recent price drop has likely been due to investor fatigue. Nevertheless, insiders have been buying the stock on the open market, which I find reassuring with regard to internal confidence at the company. Any significant uptick in sales volumes would likely bring with it a strong increase in the stock price.

Picks #1-7 will follow later in the week.

I decided to split this article into parts because the stocks I'm picking seem to be rising even as I write... I was clearly not the only person who has been thinking along these lines over Christmas... Here's what has already happened to picks #8,9, and 10 on December 26, as I was writing:.

Cree jumps on American Technology Research Comments (up 10.7%); Lighting Science up 25%; Maxwell Technologies up 6%.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, PHG, MXWL, and a short position in FSLR.
Source: Alternative Energy Gambles for 2008