The Hybrid Invasion

They're comiiiiing.

Scratch that. They're already here. Hybrids. And with every automaker jumping on the bandwagon, more models are on the way.

What we all want to know is whether any Rule Breaker investment opportunities have been created by this craze. As I see it, there are three: carmakers, battery makers, and the companies that supply the metals for the batteries. Let's dive in.

The automakers
You know these guys: Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . Those two companies have the early and dominant lead in hybrid sales because they embraced the technology sooner than any other automaker. And Honda's new electric engine (due out this fall) for the Civic Hybrid will be able to power the car while idle or cruising, moving Honda's hybrid stature closer to that of Toyota's Prius.

But hybrid technology alone won't allow any one company to separate itself from the pack -- there's simply too much competition. Every automaker is unveiling a hybrid of its own -- Ford's (NYSE: F  ) Escape, GM's Chevrolet Silverado, and Mazda's Tribute, to name just a few.

Which automaker will prevail? I have no idea. But if I were putting money on it, I prefer the two sales leaders: Toyota and Honda. They're the first movers in the industry, and as every true Rule Breaker knows as mantra, being a first mover is crucial to long-term success.

The battery makers
The two largest players in this hybrid pick-and-shovel play are Sanyo (Nasdaq: SANYY  ) and Matsushita (NYSE: MC  ) . Both are large, diversified companies that have piqued my colleague Rich Smith's curiosity because of the same hybrid sales dynamic.

At the moment, Sanyo supplies Honda and Ford, while Matsushita supplies Toyota. Since Matsushita is more financially stable, I believe the company offers the most reward. But for those willing to assume more risk, there is turnaround value to be found in Sanyo.

The wild card in all this is EnergyConversion Devices (Nasdaq: ENER  ) . The company, which has diversified into other forms of alternative energy products, holds many of the patents related to the nickel metal hydride batteries (NiMH) used in hybrids. As hybrid sales increase, the company should receive greater royalties on its intellectual property. Unfortunately, ECD has a history of losses, negative cash flow from operations, and cash burn.

Today, Energy Conversion Devices sees royalties from some of the Sanyo battery sales, but none of the Toyota sales. This is because the Toyota Prius is made entirely in Japan and then shipped to the United States, making the company's patent inapplicable. Energy Conversion Devices also has a joint venture, Cobasys, which manufactures batteries and should benefit from increased hybrid sales. ECD expects to be profitable in 2006 and is worth looking into if it progresses toward that goal in the next few quarters.

Raw materials
The other potential investment opportunities are in the companies that produce the metals that make NiMH batteries. Given that the batteries are nickel metal hydride, you might assume nickel is the name of the game. It is to some extent, but cobalt, manganese, and aluminum are also contributors.

Like most of the other companies mentioned, these metal producers are large companies with well-defined businesses already in place. The largest, Inco (NYSE: N  ) , is a publicly traded company with a strong presence in nickel, cobalt, and other metals. It also manufactures specialty nickel products used in the manufacture of rechargeable batteries.

A smaller company worth considering is OM Group; check out this article by Stephen Simpson for some more Foolish thoughts.

Foolish final words
That's a short but well-defined list of companies that may see substantial benefits as hybrid sales increase. There are also semiconductor and electrical equipment companies that could also benefit, but that's a ball of research for another day.

As a general rule, I do not recommend "theme" investing. So don't run out and build a portfolio of companies based simply on the premise of increasing hybrid sales. It could leave you underdiversified, particularly if hybrids fizzle out.

Instead, use this list of companies as a starting point for your research. As the sales trend of hybrid cars continues, you may just find a Rule Breaking investment that will flourish.

There are a ton of Rule Breaking investment opportunities appearing on the market today. From hybrid cars to nanotechnology to cancer vaccines to channel management, companies large and small are revolutionizing the way we live. For some great ultimate growth ideas, kick the tires on a 30-day free trial to Fool co-founder David Gardner's Motley Fool Rule Breakers investment newsletter service. You'll enjoy access to all of the back issues and previous picks and to the Rule Breakers discussion boards, where the RB team posts regularly and where you'll find hordes of like-minded investors sharing wisdom, ideas, and analysis. Click here to learn more.

Nathan Parmelee has no financial interest in any of the companies mentioned. You can view his profile here. The Motley Fool has an ironclad disclosure policy .