My Top 5 Alternative Energy Stocks - and 10 Honorable Mentions

by: Andrew Ling

I keep a regularly updated watch list of 30 or so alternative energy stocks. The top half of my list receives the majority of my research hours. Among them I organize a top 5 which are the stocks I would currently consider buying if certain conditions are met, usually technical. Over the past 12 months this research has been mostly fruitless as I have held mainly only First Solar (NASDAQ:FSLR). However, I am now looking for the "next FSLR."

First Solar: I have owned this stock since Feb 2007. I have continued to buy since then and have often had a "portfolio" which consisted of 100% FSLR heavily margined. However, after a disappointing quarter when cost/watt was flat and no new manufacturing was announced, I have decided to hedge my bet with Applied Materials (NASDAQ:AMAT). Until AMAT introduced their Sunfab line, FSLR had no major competition. Still, FSLR's capex/watt is half that of AMAT. The vast majority of my investments remain in FSLR, at least for now.

Applied Materials: The only company currently with a realistic roadmap for competing with First Solar on price, both in capex/watt and manufacturing cost/watt. They have the ability to leverage their expertise, and billions in capital in order to provide turnkey solutions for PV manufacturers. Their attempt to commoditize the business could revolutionize the industry, much to the detriment of other current PV players.

They are leveraging their gen 8.5 LCD fab expertise in order to create panels about 4 times the size of the largest currently available panels. Their Sunfab line utilizes readily available amorphous silicon instead of more exotic rare metals such as tellurium in cdte or indium in CIGS. The key to Sunfab will be their ability to rollout the double junction lines which will increase efficiency from a miserable 6% to a respectable 9%. With nearly $2 billion in annual income and a 1% dividend, this is the most conservative investment on the list. It's also trading at the low end of its historical valuation. That makes it the only stock on my list value investors would even consider.

Ormat Technologies (NYSE:ORA)
: A geothermal play. At 3-8 cents/kwh geothermal, this is already a proven technology and competitive with coal. There are still plenty of unexploited geothermal resources available on the west coast alone, where Ormat is headquartered. My problem with this company is that they are also in the electricity generation business. This bogs down earnings growth but also makes for much more stable and conservative growth. The recent stock offering is a good sign, showing growth prospects. This one will be even better when the stock sells off on the news.

Maxwell Technologies (NASDAQ:MXWL): The most speculative play among my top 5. Currently the largest ultracapacitor play. Ultracapacitors have the potential to displace batteries completely since they can be made cheaper, lighter, and more durable than lithium-ion or NIMH batteries. Battery technology is the main limitation of electric vehicles today. Normally I would not include a small cap in my top 5. However, due to my certainty than electric vehichles will become the norm sooner than the market expects, and the fact that there are few current options for investing in an EV company, Maxwell makes the list.

Cree Inc. (NASDAQ:CREE): One of a few large LED manufacturers in the world. Compact Fluorescent and LED lighting are the most cost-effective ways to conserve energy today. Incandescent lightbulbs are scheduled to be phased out completely. Many people don't realize than CFs have their problemstoo, namely a hazardous amount of mercury if the bulb is broken. Though LEDs consume about 10% of electricity as incandescents and 30% of that of CFs. LEDs are currently quite expensive, at about $70 for a 100 watt equivalent. Also these 100-watt-equivalent bulbs are made up of multiple LEDs, as single LEDs have been unable to economically provide adequate lumens.

This $70 "investment" will pay for itself in energy savings many times over, not to mention all the hassle saved from changing bulbs, as LEDs can last a lifetime. However, most people will suffer "sticker shock" at the high upfront cost. When the price is reduced about 50%, it will hit the consumer's sweet spot and begin to achieve mass market appeal. A risky strategy of integration and alienating former OEM manufacturers may explain recent underperformance.

Honorable mentions:

MEMC Electronic Materials (WFR) - Rumors of the demise in the profitability of polysilicon may be greatly exaggerated. The majority of the Chinese polysilicon plants scheduled to come on line in 2008 are ungoing delays and production problems. Polysilicon shortages may continue well into 2010, especially if major new solar subsidies are introduced perhaps by the US or China.

Energy Conversion Devices (NASDAQ:ENER) - One of the oldest alternative energy plays. Founder invented the NIMH battery. NIMH is a proven alternative to lithium-ion batteries for electric vehicles. Lithium currently has a 20% annual degradation in capacity regardless of use. Also has a promising thin film amorphous silicon PV business in Unisolar. Has long been mismanaged but a great quarter moves it into the watch list.

Evergreen Solar (ESLR) - Another amorphous silicon manufacturer which turned a profit for the first time last quarter, albeit only 1 cent/share.

SunPower (NASDAQ:SPWR) - Offers the highest efficiency PV product. Also considered aesthetically superior for built in PV (BIPV) applications. Expect to pay a premium of about 10%/watt for SPWR product. In the long run when polysilicon prices eventually come down, SPWR could be the biggest beneficiary as price becomes less of an issue and maximizing power generation per square foot becomes more of one. Also has a tremendous amount of exposure to the US market.

Ascent Solar (NASDAQ:ASTI) - The largest publicly traded CIGS thin film PV manufacturer. A viable technology sometimes deemed "3rd generation" PV. Numerous startups in this field with moderate funding make it hard to determine who the leader in this field with be.

Altair Nanotechnologies (NASDAQ:ALTI) - A highly speculative stock with tenfold appreciation potential. Likely to trade flat for years to come until successful commercialization is proven. Has developed a battery for electric vehicles which charges in 10 minutes but is significantly more expensive.

Ocean Power Technologies (NASDAQ:OPTT) - The least proven of all the stocks on the list. Develops buoys for ocean wave power generation. Currently trading below the value of their cash assets. Like ALTI, needs to prove commercial success.

Akeena Solar (AKNS) - This name is of interest because it's the largest pure play among solar installers in the US market. Far from my favorite investment vehicle, it acts as my barometer for the health of the solar industry since they carry products from Suntech (NYSE:STP), Sunpower, and Kyocera (NYSE:KYO).

Emcore (NASDAQ:EMKR) - Another next-generation PV company. Along with Boeing's Spectrolab, Emcore makes the world's highest efficency solar cells. The concentrated PV market, which uses mirrors to reflect sunlight onto efficient and relatively small areas of PV cells, gives this company enormous potential.

5N Plus [VNP.TSX] - First Solar's main tellurium supplier traded on the Toronto exchange. Relatively large market cap for a TSX stock. Has tenfold appreciation potential due to the upward pressure on tellurium prices. Can be viewed as a safer way to benefit from FSLR's growth.

Disclosure: I am long FSLR and AMAT

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