Diversification, a core aspect of most modern-day portfolios, is a strategy many advisers advocate for reducing the overall risk of an investor's holdings. The strategy is used to safeguard a portfolio so that problems at one company cannot single-handedly sink it. Investors who neglect to diversify are more prone to single negative events than those who adhere to this basic strategy.

With the BP (NYSE:BP) oil spill into its third month now, many investors, including institutional investors, were given a very expensive lesson in diversification. Numerous pension funds, especially the ones in the U.K. that had invested a large portion of their portfolios in BP stock, found themselves in a very bad position. According to The Times in London, approximately 17% of all dividends paid to U.K. pension funds came from BP. This means that 17% of pensioners' dividend income was eliminated when BP cut its dividend, on top of witnessing a 50% drop in BP's stock year to date.

IN PICTURES: 7 Forehead-Slapping Stock Blunders

So, in the name of diversification, let's take a look at alternative energy investments to help balance your portfolio.


Based out of Reno, Nev., Ormat Technologies (NYSE:ORA) is one of the more profitable alternative energy companies available. The company designs, builds and operates geothermal systems and recovered energy-based power plants worldwide. Ormat currently trades at a valuation premium relative to its peers, with a P/E multiple of 25 compared to 12 for the industry. However, the expected growth for Ormat is high, which leads to a potentially attractive PEG ratio of slightly less than 1. (For related reading, check out Clean Or Green Technology Investing.)

Natural Gas

A recent report by the Massachusetts Institute of Technology (MIT) predicts that the U.S. will double its consumption of natural gas within a few decades. The report expects the market share for natural gas to increase from its current level of 20% to 40%, thanks to natural gas's cleaner burning properties and abundance of supply.

EnCana (NYSE:ECA), a pure play natural gas company, will likely benefit from the increased demand in natural gas. The company trades with a trailing P/E ratio of 10.4 compared to an industry average of 12 and the S&P/TSX Composite average of 15.7. Despite its low valuation, most analysts appear bearish on EnCana right now, which is likely due to the declining trend in natural gas prices and the existing glut of supply. According to Reuters, 13 analysts have a "hold" rating on the stock, while nine others have either a "buy" or "outperform" rating. (To learn about investing in natural gas, read Become An Oil And Gas Futures Detective.)


Uranium is the one alternative energy that, in my opinion, has the greatest potential to fill the world's future energy needs. Uranium is a phenomenally powerful fuel source. A handful of uranium has the potential to generate more energy than over 100 tons of coal. In addition, many anticipate a supply shortage of uranium within the next five years. According to the Global Top 10 Uranium Mining Companies Benchmarking Analysis, uranium reserves fell from 697,177 tU in 2008 to 669,270 tU in 2009. Reserves are not replenishing as fast as demand is growing, which could lead to a steady rise in uranium spot prices over the next few years.

Canada-based Cameco (NYSE:CCJ, TSE:CCO) is the top company when it comes to uranium mining with respect to size. The company owns assets in the U.S., Canada, Australia and Kazakhstan and trades with a P/E multiple of 11.5 compared to 18.7 for the industry. Similar to EnCana, analysts are fairly bearish on Cameco, with 12 rating the stock as a "hold" and another seven rating it either a "buy" or "outperform".

Bottom Line

Look to diversify some of your energy stocks into alternative energy stocks. Some of the alternative energy sectors are currently out of favor with analysts, and those may very well be the areas that are the best to look into. (For more stock analysis, take a look at Making Money With Regional Banks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!