Sun Kissed

Illustration by Marc Boutavant

Face it: alternative-energy stocks have been one huge joke for the past 30 years. Half the companies that fit the “alternative” rubric were scams, designed to appeal to clueless do-gooder investors, and the other half needed a darned fool president like Jimmy Carter to subsidize them just long enough to take our tax dollars and then our stock dollars before they faded into well-deserved oblivion. Anytime anything became close to economically viable, opec simply turned on the tap, drove oil down to some level where the oil-independent saviors couldn’t make a living, and eliminated the competition, unfair and unsquare.

Until now. Now oil’s high and going higher, and opec’s got no spare capacity to bring the price down. The Saudis keep claiming they can pump more, but the figures show otherwise. Every time there’s a terrorist attack on an oil facility (and you can bank on more to come), oil goes higher. Perhaps best of all for alt-energy, most of the areas where oil can still be produced with abundance are either too costly to drill, because they’re in the Arctic or Siberia, or they’re in locales cursed with perma-jihad. Oh, yeah: George W. Bush (George W. Bush!) began pumping alt-energy in his State of the Union address.

That means, for the first time in investing history, this motley collection of companies may make up a genuine industry. You can buy these stocks based on expectations of profit, not just press releases. Some of these companies may actually turn out to be big businesses, big enough that they will attract bids from the likes of a BP or a Royal Dutch/Shell, outfits that can’t seem to find enough oil to have big businesses long-term.

Let’s start with solar. This is a business that, for years, has taunted investors with acres of diamonds that turned zirconium with any drop in oil below $30 a barrel, the price where sun power seems to lose viability. Now, with $30 oil a distant memory, I’ve got two solid plays, SunPower and Energy Conversion Devices, the two blue chips of this nascent industry.

When we first thought solar power made sense, we envisioned these boards of solar cells that would harness “Mr. Sun” in an almost photosynthetic way. Guess what? The solution is here: It’s SunPower. This company, a 2005-vintage IPO, produces solar panels that are substantially more efficient than the next guy’s, making it instantly profitable at current energy prices. Plus, this isn’t some mom-and-pop Birkenstock labor colony; these guys knock out the panels in the cheap-labor environment of the Philippines, and they produce them with a slick all-black look that makes them the darlings of expensive home designers. But it’s a clever enough company to be located in California, the home of the biggest solar subsidies. Its technological savvy stems from its bloodlines: It’s an independent subsidiary of Cypress Semiconductor, a leading maker of low-cost semiconductors. I think the company can do $300 million to $400 million in sales next year, up from about $78 million last year, which gives it the fastest rate of revenue growth of any company I follow. No wonder the stock seems to have taken up permanent residence on the 52-week-high list. The stock doubles if it can make that revenue ramp.

If SunPower’s the new kid on the alternative-energy block, the second solar play, Energy Conversion Devices, is the grandfather. It went public in 1967, long before anyone even dreamed that oil might go to $60, and now, alas, the dream has been fulfilled. I hated this company most of the time I was trading at my old hedge fund because it represented such a hodgepodge of alt-energy solutions. Now with oil so expensive, that same pastiche has made this company a veritable Whole Foods of power. Most solar plays use cells heavy with silicon, a suddenly expensive commodity thanks to a worldwide shortage. Energy Conversion uses thin-film technology, like the stuff used in disk drives. It’s less efficient than silicon but a whole lot cheaper and easier on the eyes: The stuff just looks like plastic wrap and can be readily embedded into roof shingles. No bulky panels, slickly designed or otherwise!

Energy Conversion also has a memory business that is an improvement on flash, the technology behind the iPod Shuffle, but is a tad more expensive to produce. I was skeptical, but the company just signed a licensing agreement with flash pioneer Samsung that could produce material revenues in the near future. And it has a battery technology that’s less expensive than lithium and may be perfect for the electric-hybrid market. Toyota and GM will soon be paying Energy Conversion royalties for the Prius and Saturn Vue hybrids. Energy Conversion’s not undiscovered; Bush visited its solar plant last month. But the company will be producing some 300 megawatts of energy in the next few years, actually earning the attention and the publicity that it’s recently attracted. By the time you read this, the company will have sold 6 million additional shares, so it won’t need capital to grow, and its expansion plans will place it among the largest solar-power companies in the country. It could break out of the “small is beautiful” alt-energy ghetto.

Windmill power, long about as rational as Don Quixote, has, at last, become not only viable but also profitable, as one look at the General Electric Website—recently fronted with windmills—attests. But buying GE for windmills is like buying it for dishwashers; forget it—wind isn’t a big enough business to drive GE. Instead, there’s Distributed Energy Systems. Here’s another company with a mosaic of energy alternatives, the fastest growing of which is wind. Distributed also has its bases covered with solar, biogas, and hydrogen businesses. It’s the hydrogen technology that fascinates me. Most alt-energy companies haven’t made revolutionary leaps, but Distributed can put a machine on-site that can split water into hydrogen and oxygen, then make power out of the hydrogen through fuel cells. That makes Distributed a reliable backup plan for companies that fear Katrina-like grid breakdowns. The company won’t make money until next year, but it sells for less than $10, so you aren’t paying up for its lack of profits.

My final alt-energy pick belongs in the total spec category: Capstone Turbine. This company makes microturbines, small backup generators that use natural gas to create electricity. I started to write off this company when natural gas rose to $15 a unit a few months ago, post-Katrina, but now that natural gas has come back to the $5 to $7 range, where Capstone’s generators can generate a quick payback, I want in. Wal-Mart’s testing Capstone’s microturbines in one of its stores, and KeySpan, the local electric company just snapped up by the Brits, is Capstone’s selling partner. Right now, any company that uses these microturbines can sell back its excess power directly onto the grid to create payback in five years. Capstone’s been ignored by the Street just when its product makes the most sense, when you can lock in low natural-gas prices. The company’s not profitable, but then again, it’s at $3.

These companies may finally make up an industry. You can buy them on the basis of profit, not promises.

I’ve got more alt-energy stocks that make sense—Zoltek, which makes carbon fibers needed for windmills, and Ormat, an Israeli company with great geothermal technologies—but those have run up so much I’d advise waiting for a pullback. Both might be worth buying if they pulled back 10 percent.

Either way, alternative energy makes too much sense now to ignore. I like to think of these companies as energy biotechs, using new technologies to create new products that the big dogs lack the DNA, no pun intended, to develop. I’d buy half a position now, wait for a couple of warm days, and then buy the rest, as Wall Street is still hopelessly negative on the price of energy itself, always thinking we are just a few sunny days away from $40. When you consider that we had the warmest January on record and oil is still hovering around $60, you can bet that we are far closer to our lows than our highs for the next couple of years. Who knows? Soon, we may not regard the group as “alternative” energy but as “cheap” energy, which might in fact be a more accurate sobriquet.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Halliburton and Altria.

E-mail: jjcletters@thestreet.com.

Sun Kissed