Alternative Energy: Want the Last Laugh?

While Wall Street sneers, savvy investors may find opportunities

In his slide-show on alternative-energy stocks, analyst David Kurzman of H.C. Wainwright often shows two charts: one for a fuel-cell manufacturer and another for a dot-com. Without disclosing the companies' names, he asks the brokerage's clients if they can tell which is which. They're always stumped. The amazing peaks of Ballard Power Systems (BLDP ) in the late 1990s match those of (AMZN ). So do the troughs in 2000 and 2001.

While such dot-coms as Amazon, eBay (EBAY ), and Yahoo! (YHOO ) have bounced sharply in the past year, alternative energy stocks -- companies that make such devices as fuel cells, microturbines, or solar-powered generators -- have not. "Wall Street doesn't believe in most alternative-energy companies," says Kurzman. Indeed, many analysts have stopped covering the industry, and information on it is scarce.

But it's when the crowd's not paying attention that opportunities often arise. In some cases, alternative-energy stocks are so cheap, they trade for less than the cash on their balance sheets or the value of their assets if liquidated. Microturbine maker Capstone Turbine (CPST ) has $1.72 a share in cash on its balance sheet yet currently trades at $1.20, notes Richard Giesen of Munder Power Plus Fund, which has 20% of assets in alternative-energy stocks. That cash should last the company three to four years -- long enough for it to turn profitable, he says.

Much of the interest in alternative energy is in fuel cells. Basically, they convert hydrogen into electricity through a chemical reaction, but there are different types. Ballard Power's proton exchange membrane (PEM) fuel cells have gotten the most attention because they're designed to work in super-efficient hydrogen cars. But so far, they're so expensive to make, even Ballard says they won't hit the road until at least 2008. Perhaps that's why Ballard is down 90% from its all-time high in 2000.

The molten carbonate fuel cells that FuelCell Energy (FCEL ) in Danbury, Conn., makes are already in use at hospitals, hotels, and industrial plants. Such cells aren't suitable for cars since they reach temperatures as high as 650C. But elsewhere, that's a plus. Capstone Turbine's microturbines harness these cells' superhot exhaust to produce more power. The combined cell-turbine system is more than twice as efficient in electrical production as a standard generator. Despite that, FuelCell is trading a little above its book value of $6.51 a share.

Another opportunity may lie in an Israeli company, Medis Technologies (MDTL ). Medis manufactures rechargeable ethanol fuel cells that last three to five times longer than conventional batteries that power cellular phones and laptop computers, yet they are comparably priced. Medis already has a partnership with defense contractor General Dynamics (GD ) to sell battery packs for military personal digital assistants (PDAs) and it is developing ones for consumer electronic devices. Ultralife Batteries (ULBI ), a favorite of Kurzman's, caters to the military and the health-care industry, manufacturing high-end lithium batteries that can last 10 years in a radar system or a pacemaker. The company just turned profitable in the first quarter.

BIG ADVANCES. Chances are, the big seller in the auto industry will not be hydrogen cars but hybrid vehicles that use a combination of battery and gasoline power. Toyota (TM ) Motor has already sold more than 100,000 hybrids, and its new $20,000 Prius gets 52 miles per gallon in the city -- almost double that of a traditional car. UQM Technologies (UQM ) based in Frederick, Colo., manufactures the electric motors for most of the hybrid cars on the market, says Giesen, who owns UQM stock. He forecasts that the company will generate an operating profit this quarter or next.

Solar power has also become a viable energy alternative. "Twenty years ago, solar technology was only good for heating your swimming pool," says Giesen. "Now, it can add energy to your house throughout the day and store extra power overnight in batteries." Energy Conversion Devices (ENER ) has developed the best solar technology for industrial use, Giesen says, while AstroPower (APWR ) is tops for homes. Both have suffered sharp declines in the bear market even though their revenues are climbing. AstroPower trades for half its book value; Energy Conversion sells for only 1.6 times its book value.

Windmill generators now produce electricity as cheaply as coal units. The closest thing in the U.S. to a pure play in this sector may be utility FPL Group (FPL ) which gets 24% of its electricity from wind. If you want a really pure play, two Danish companies, Vestas Wind Systems and NEG Micon, build windmill generators. Neither trades on U.S. exchanges -- yet. But if alternative energy continues to grow in popularity, it's only a matter of time before they will.

Corrections and Clarifications This story should have said that FPL Energy -- not holding company FPL Group, of which it is a subsidiary -- gets 24% of its electricity from wind.

By Lewis Braham

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