A Forgotten Energy Technology

The concept of creating energy from nothing seems similar to the dream of Middle Age alchemists who tried to conjure up gold from thin air. Except for one thing - in the 21st Century, generating energy from non-fossil fuel sources is the real deal.

Now there is wind power, solar power and other low-polluting ways to generate electricity - and all are important as demand for electric power puts pressure on the modern grid. The U.S. Energy Information Administration estimates that global electricity demand will reach 28.9 trillion kilowatt-hours by 2025, up from 18 trillion kWh in 2006.

In a little known index I found a company that's involved in one of the former trendy energy technologies that has fallen out of favor in recent years. Yet the company I found was one of the hottest stocks at the end of 2010 on my secret index -- the Russell 2000.

Interest appears to be growing in fuel cells, and FuelCell Energy FCEL is heating up with investors. The stock's return in the final three months of the year was 104 percent, making FuelCell Energy the second-best performer on the Russell 2000 as of December 31.

Fuel cells, which were first conceived in the 19th century, can create power by putting a gas - such as hydrogen or methane - in contact with a reactant, in the presence of a catalyst. Fuel cells are low in pollution, very reliable and generally more efficient than competing technologies, but the manufacturing plants are expensive to build.

According to the latest data available from Price WaterhouseCoopers, shipments of fuel cell systems in 2009 were approximately 24,000 units, an increase of 41 percent over 2008.

***FuelCell Energy is no newcomer to the technology, having been founded in 1969 in Danbury, Connecticut. It shipped its first commercial power unit to the Kirin brewery in Japan in 2003.

Now its power generators can be found throughout the world in a diverse range of industries - from an onion farm to a bakery that uses organic waste as fuel, to a California prison. In fact, many of its commercial sales have gone to California, the leader in America's push for green energy. That said, South Korea remains FuelCell's largest market.

The company reported that for the fiscal year ended October 31 it cut losses by 18 percent when compared with the year before, but revenue fell slightly to $19.7 million. The company said its sales backlog at fiscal year-end was $154.3 million, its largest ever. During 2010, FuelCell Energy also received its first order from an electric utility, Pacific Gas & Electric (NYSE: PCG).

On January 10, FuelCell Energy announced that it had agreed to sell 10.2 million units to an investor, which will raise $17.8 million for product development and expansion of manufacturing capacity.

***Analysts following FuelCell Energy have remained fairly bullish on shares, with three of the six following the company rating it a "strong buy." Currently, the median 12-month price target is $3.25, which represents 63 percent upside potential.

FuelCell Energy's stock has doubled since moving below $1 in August, and I would have to label any investment in this company as speculative. But as the world's power demands continue to grow and alternatives become increasingly competitive, we're likely to hear more about fuel cells.

Now is a good time to invest in energy, and my Small Cap Investor PRO portfolio includes several interesting energy companies, including one in the red-hot China market. Click here to learn more about how to use the Russell 2000 to find the best stocks.

Disclosures: None