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3 Things to Watch With This Revolutionary Energy Stock

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Alternative energy has lots of potential players, but only a select few will be the kind of winners that reward investors hundreds of times over.

Fellow Fool -- and current Rising Star champ -- Alyce Lomax and I have each singled out Solazyme (Nasdaq: SZYM  ) as a stock to watch for those wishing to ride the wave of the future. The company is able to use its patented algae to produce oil from things as simple as sugarcane, corn, forest residue, and grass.

After Solazyme's latest earnings release and conference call, three key situations have emerged to keep your eye on if you're interested in this stock.

1. Demonstrating the technology
Solazyme is focusing on producing oil in three broad areas: fuel and chemicals, health care, and nutrition. One of the most promising revelations of the past quarter was that Solazyme was able to deliver the requested 283,000 barrels of military-spec oil ahead of schedule to the U.S. Navy, and the Navy has indicated it will be exercising the second phase of the production agreement.

On the nutritional front, the company continues to partner with Whole Foods (Nasdaq: WFM  ) and GNC (NYSE: GNC  ) for the distribution of their health-conscious Golden Chlorella brand.

And when it comes to health care products, the word is getting out about Solazyme's anti-aging Algenist brand. The brand is becoming more readily available in both Canada and the United Kingdom, while The Shopping Channel just started last month touting the product on its highest-rated beauty program.

These are all promising developments in the company's quest to get the word out that its product actually delivers.

2. Commercialization
Even though revenue was up 68% compared to the same quarter last year, the company actually lost more than twice as much money. One of the main reasons for this was that sales, general, and administrative costs increased 177% and went from being 37% of operating expenses during the second quarter of 2010 to a whopping 52% this year.

Clearly, the company sees a unique value proposition it has to offer the market, and it's looking to gain traction. Companies such as Dow Chemical (NYSE: DOW  ) , Unilever (NYSE: UN  ) , and Chevron (NYSE: CVX  ) have already formed partnerships with Solazyme, but this list needs to continue growing to justify the money it is allocating to its sales team.

3. Feedstock and capacity
The push to use ethanol as a clean additive in gasoline was heralded as a breakthrough technology when it came on the scene. Years later, ethanol has largely been a disappointment. Besides not creating the energy independence, it has both caused and suffered from rising corn prices.

With these lessons in mind, some investors are worried about Solazyme's dependence on feedstock. In its defense, Solazyme can use a wide variety of feedstock to give to its oil-producing algae. Even so, without partnerships in place, Solazyme could be stuck with tons of special algae on its hands with nothing to feed them.

A joint venture with French Roquette Freres has ensured that feedstock will be provided for Solazyme's food brands. A similar venture with Bunge Limited (NYSE: BG  ) in Brazil promises to provide Solazyme with access to the sugarcane in a new 100,000 metric ton facility.

In addition, Solazyme just got approval to open up an enormous plant in Peoria, Ill., that it bought for the production of its patented oils. These developments are promising, but it's important to remember that Solazyme will be exposed to commodity swings moving forward.

Room in your portfolio
It's difficult to know who tomorrow's winners will be today. Hopefully, the three broad categories I've laid out above will help you decide whether Solazyme deserves a place in your portfolio. I still haven't decided for myself whether Solazyme is right for me, so I'll be placing it on my watchlist for now -- which is what I think you should do as well.

If you'd like to find out about an oil stock that no one at The Motley Fool has doubts about, I encourage you to take a look at a special free report assembled by our top analysts: "The Only Energy Stock You'll Ever Need." Inside, you'll find out about a company that provides the picks and shovels necessary to unleash the world's energy potential. It's yours today, absolutely free!

Fool Brian Stoffel owns shares of Whole Foods. The Motley Fool owns shares of Whole Foods Market and Solazyme. Motley Fool newsletter services have recommended buying shares of Whole Foods Market and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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