Taking Stock of Green Energy Options

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And some of the most intriguing outfits are off-limits to small investors, at least for now. In 2006, U.S. venture capitalists invested $723.3 million in alternative energy startups, according to the National Venture Capital Assn., more than in the past 10 years combined. Goldman Sachs (GS) has stakes in a portfolio of private renewable energy companies including cellulose ethanol outfit Iogen, and energy management company Gridpoint.

The Big Picture

So what are alternative energy-minded investors to do? They can start by broadening their horizons.

A more certain gamble than betting on a particular renewable energy company is betting on an increased use of renewable energy in general. Ironically, the smart way to play that may be to invest in the traditional industrial companies that will facilitate the transition of sustainable energy sources, much like Cisco (CSCO) helped to build out the communications infrastructure that facilitated the rise of the Internet.

Consider ethanol. Last year ethanol prices spiked after the corn-based fuel was added to the gas supply in several regions. Because ethanol cannot travel in pipelines premixed with gasoline, it required its own transport, often railroads.

With more ethanol use required by law, that could present a strong revenue stream for railroads including Burlington Northern Santa Fe (BNI) and Union Pacific (UNP). Even so, Morningstar analyst Peter Smith says that ethanol by itself isn't enough to make the railroads a buy, especially as both stocks have performed well in recent years, making analysts question if there's room for more upside.

Even with the rails poised to pick up an increasing share of nonpetroleum fuels such as ethanol—as well as the old fossil-fuel standby, coal—investors may wish to bide their time until valuations of these companies become more attractive.

Similarly, Standard & Poor's analyst Stewart Scharf says companies like construction engineering concern Jacobs Engineering (JEC) and rail and transport group Trinity Industries (TRN), both of which he rates strong buy, could benefit from a push into renewable energy.

Exploring Their Options

Another option for investors: Well-established companies that are taking steps into renewable energy such as Siemens (SI) and rival General Electric (GE). Among their initiatives, both companies have wind power businesses.

Neither, however, is strictly a renewable energy outfit. "You can't play them that way," says consultant Fusaro. As purely green companies they're overvalued, he points out. But it's easy to think that these industrial giants will deepen their push into alternative energy in coming years as carbon emission and scarcity worries surround oil and natural gas.

It's not easy being green, but motivated investors can make the best of their limited options. For those wanting to put their money on the growth of alternative power sources, a little homework—and lot of patience—may be required.

Halperin is a reporter for BusinessWeek.com in New York.