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. With the dramatic rise of energy prices in the last several years, the traditionally boring oil and natural gas companies have become a focus sector for many investors. One side effect of increasing energy prices for carbon-based fuels has been a renewal in push for developing an alternative replacement fuel. With the potentially enormous profits to be made from a commercially viable alternative energy source, investors have been flocking to various names in ethanol, solar, clean coal, wind, and others. While much speculation is present in those companies – especially on spikes in oil prices – potential investors need to be able to remain rational and objective in order to avoid being burned. This requires doing diligent research into the profit potential of the company’s story – not simply buying into “xyz fuel source is the answer” and blindly following the crowds into volatile stocks. Here, we present an overview of the breadth and depth of alternative energy companies.
Ethanol: With the ability to be produced from regular crops such as corn and sugar, ethanol captured the fancy and investment capital of many individuals and firms. Although certain forms – namely sugar – are more effective than others (Brazil uses sugar-based ethanol as a significant portion of its fuel), the U.S. government mainly subsidizes corn-based ethanol production. While ethanol may not be the most competitively priced fuel, but as long as it receives subsidies of over 50 cents per gallon, it will undoubtedly remain on the radar screen. Long-term, however, we question the role corn-based ethanol will play in feeding America’s energy needs; sugar is undoubtedly the better production process right now. Ethanol plays include Archer-Daniels-Midland (ADM), MGP Ingredients (MGPI), Diversa (DVSA) and Pacific Ethanol (PEIX).
Wind: Electricity generation from wind is a clean source of fuel; although the enormous turbines required to make power often make installation a politically difficult process. One of the companies with the most specialization in producing the equipment for making wind power is General Electric (GE). Although not a pure play with its diversified operations, GE has the scale and know-how to dominate the market in this area. Although most wind companies are small and listed on the Pink Sheets or OTCBB exchanges, another major player in wind power is Scottish Power (SPI).
Solar: Although the ethanol frenzy has subsided to a degree, the promise of endless energy from the sun is a tempting goal for companies to target. Keep in mind that the solar power systems offered by these companies are unproven, and as such the risks of investing are high. Solar plays include First Solar (FSLR), Suntech Power (STP), and Sunpower (SPWR).
Big Oil: While the major integrated oil companies are not normally considered friends of alternative energy, both British Petroleum (BP) and Royal Dutch Shell (RDS) are investing in more than oil production. Exxon Mobil (XOM) is sticking to black gold, however.
Coal: Normally grouped with oil as a “dirty fuel,” coal has the potential to make a comeback as technology makes its usage, if not image, cleaner and more efficient. The primary play on coal is through synthetic fuels (synfuels), which are the equals of petroleum distillates although they can be cleaner with the right production process. Major synfuel plays are Sasol (SSL), the South African energy giant that fueled that nation with coal synfuels during their oil embargo as a result of the apartheid, Rentech (RTK), and combination alternative energy and construction materials company Headwaters (HW). |
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