With the world's population growing at a rapid pace, there is much debate over how we will power ourselves. Energy usage is expected to rise exponentially over the next decades and new alternative methods and traditional energy sources will all get their turn in the sun. However, with pending austerity plans, subsidies and traditional energy-related disasters rearing their heads, it can be difficult to pick winners in the energy race. Blanket investments in alternatives such as the PowerShares WilderHill Clean Energy (NYSE:PBW) or traditional means such as Energy Select Sector SPDR (NYSE:XLE) make sense for overall portfolio diversification, but focusing on efficiency and reducing needed energy could provide better gains for a portfolio.

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Removing Energy Hogs
At the end of 2007, Congress enacted the Energy Independence and Security Act, which gave the directive to end production of most incandescent bulbs between 2012 and 2014. These "old school" light bulbs are extremely inefficient as only 5% to 10% of their energy used is given as light, while the rest is released as heat. This factor is extremely important when nearly 25% of the energy we consume goes into lighting our homes and businesses. While compact fluorescents lamps (CFLs), incandescent bulbs' more efficient cousins, are quickly being adopted by the main stream public, another technology, first created in the 1960s, offers better energy reduction and savings.

Already a staple in many electronic devices, light emitting diodes (LEDs) could be the answer to help decrease energy usage. New technologies in LED lighting have moved the semiconductor from the TV remote to high-efficiency bulbs. To produce the same amount of light as 40 to 100 watt incandescent bulb, a comparable LED will only consume three to 13 watts of power, a significant savings. They produce little to no heat and have an average lifespan of 50,000 hours. (Learn more about investing in alternative energy industries, read Clean Or Green Technology Investing and Top 10 Green Industries.)

Room for Growth
While LEDs make up only about 1% of the $60 billion lighting marker today, analysts estimate that by 2020 they will make up almost 80%. In addition, advances in flat panel monitor and TV equipment are helping spur growth in the chips. Total consumption of LEDs across all forms reached 63 billion units in 2009, up from 57 billion in 2008. Widespread usage of the semiconductor form has many analysts bullish for the rest of year and some are even calling for potential supply shortages.

Giving Some Brightness to a Portfolio
Nearly half of the market for LED bulbs is produced by a handful of manufacturers. GE (NYSE:GE), Phillips (NYSE: PHG) and Siemens' (NYSE:SI) Osram unit are some the largest producers with Toshiba (OTCBB:TOSBF) and Panasonic (NYSE:PC) rounding out the space. These large conglomerates have many moving pieces and lighting is just one facet. Investors do have a few options with regards to pure players.

Cree (NASDAQ:CREE) produces LEDs for several markets, but specializes in lighting technologies. The company generates some of the most efficient and high-yielding chips, and are quickly becoming the industry standard. The stock has risen from nearly $20 in 2008 to around $60 today. It isn't cheap trading at forward P/E of 27 and a PEG of 1.73, but its premium may be deserved as the industry leader. Any pullback in share price could be a buying opportunity.

Just as with the regular semiconductor market, there are plenty of companies who manufacture the chips themselves, but only a handful that make the equipment to do so. Similar to Applied Materials (NASDAQ:AMAT) with regular semis, Veeco Instruments (NASDAQ:VECO) and German firm Aixtron (NASDAQ:AIXG) produce the equipment needed to make LED chips. The two firms should see long term growth in LED portfolios as adoption of the technology and potential shortages will cause the need for more production equipment.

Bottom Line
As energy consumption continues to rise along with our population, new ways of managing energy efficiency will gain credence. LED technology is a perfect example of a low cost, consumer friendly technology that has a real impact on the amount of energy consumed. The preceding stocks are a great way to add the growth of LEDs to a portfolio. (Learn how global warming is starting to heat up America's corporate climate. check out Can Business Evolve In A Green World?)

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