Playing The Growing LED Industry

By Aaron Levitt | May 18, 2011 AAA

Remember when the first USB Flash drives used to cost hundreds of dollars and hold only a few megabytes worth of data? Since then, improvements in technology and manufacturing methods drove down costs and increased storage size. Similar advances are happening within the energy-efficiency space. As energy-guzzling 100-watt light bulbs are slowly disappearing from store shelves, a new wave of cost and energy-efficient bulbs is set to replace them. And just like flash storage before them, new technologies are making them cheaper for consumers.

TUTORIAL: Exchange-Traded Funds

A Focus on Energy Efficiency
The technology in traditional "incandescent" bulbs is more than a century old. Such bulbs waste the majority of the electricity used to power them by turning it into heat. Only about 5% to 10% of their energy used is given as light. To help reduce America's energy usage, Congress enacted the Energy Independence and Security Act; this bill gave the directive to end production of most incandescent bulbs between 2012 and 2014. Compact fluorescents lamps (CFLs) have quickly been adopted by the mainstream public. The drawback of CFLs is that they contain a small amount of mercury vapor, which is released if they break or are improperly thrown away. The next step beyond CFL bulbs, semiconductors called light emitting diodes (LEDs), are more energy efficient, last forever and are getting cheaper for consumers.

The potential for LEDs is huge. Industry experts estimate that about 90 million 75-watt incandescent light bulbs are sold each year in the United States. Switching these to LEDs has the potential to reduce energy use by 5,220 megawatts of electricity and save approximately $630 million annually. Those goals may be within striking distance, as well. The Department of Energy anticipates that a 60-watt equivalent LED bulb will cost $10 by 2015 or about the same price as a CFL. Current LEDs cost about $45. Philips (NYSE:PHG), which produces LED bulbs, predicts the technology will take 50% of the residential lighting market by 2015. Longer term, analysts estimate LEDs will make up almost 80% of the market by 2020.

Innovation continues to move at a rapid pace within the LED sector. Google (Nasdaq:GOOG) has partnered with low cost LED producer Lighting Science Group (OTCBB:LSCG) to create a bulb that is controllable from an Android phone or Wi-Fi network. The idea is to allow users to be able to dim or shut off their bulbs remotely or to program them. Chipmaker Marvell (Nasdaq:MRVL) has come out with a controller that will allow bulb makers to incorporate loosely binned or lower cost LEDs in their bulb in order to cut costs. This would allow contract manufacturers to enter the LED lighting industry easily and reduce consumer "sticker shock."

Playing the Innovation
With 25% of the energy we consume going into lighting our homes and businesses, LEDs will certainly have a bright future. Conglomerates like Siemens (NYSE:SI) and Panasonic (NYSE:PC) have their hands in the LED market. There are plenty of pure-plays as well.

Shipments of the equipment needed to make LED chips to China rose about 10% in the first quarter, according to data from IMS Research. The nation has become a hot bed of LED manufacturing. For investors wanting to play the growth in LEDs, focusing on the equipment makers is an area to consider. Aixtron (Nasdaq:AIXG) and Veeco Instruments (Nasdaq:VECO) produce the equipment and Rubicon Technology (Nasdaq:RBCN) produces the sapphire substrates.

Another new lighting technology, organic light-emitting diodes (OLED) are glowing sheets or tiles, rather than individual light sources. They're currently used as vibrant color screens for smartphones, but both Acuity Brands (NYSE:AYI) and Universal Display (Nasdaq:PANL) are working on new ways of incorporating OLEDs into lighting fixtures.

Bottom Line
As we continue to grapple with increasing energy demands, technology is helping find solutions. The LED lighting segment is poised to grow exponentially in the future as we seek new energy-efficient solutions. The previous stocks are a good way to play the shift. (There are no strictly-forex programs, but there are still some advanced education alternatives for forex traders. To learn more, refer to 5 Forex Designations.)

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