Renewable energy stocks' volatile ups and downs can intimidate investors. Words like ethanol, biomass, and hydrocarbon can further complicate this elusive field. If high school chemistry isn't coming back to you, not to worry: We'll simplify these ideas and look at certain companies that are poised to power above the rest and take advantage of this developing field.
The biofuel backstory
To clear up some of the technical jargon, biofuel converts biomass -- plants and organic waste -- into energy. Half of the renewable energy in the U.S. comes from biomass:
Source: Biomass Power Association.
Ethanol, one of the most widely used biofuels, is made from corn and sugarcane. But the largest producers in the U.S. and Brazil face unpredictable fluctuations in those raw materials as the climate varies and food prices shift.
Innovators are trying to develop new ways to decrease the reliance on food products for making fuel, and pouring a lot of their research into renewables. Adding the following companies to your portfolio could make this a green movement in more ways than one!
Biofuels at the forefront
Renewable Energy Group
However, BP is entering this field gradually, and still sticking to what it knows in the management and transportation of oil and gas. Its size and diversification of products makes BP a standout among the smaller biofuel companies. Its 4.6% dividend doesn't hurt, either! BP faces some uncertainty in the next few years, as the renewable technology it employs is still in its infancy. The dark cloud of the oil spill still hangs over the company because the final associated costs have yet to be seen.
A close competitor, Amyris
What to watch out for
The biofuel industry is incredibly cyclical, relying on high gas prices to stimulate demand. These companies have a heavy burden that they must balance as they look to the future, according to Pacific Biofuel. Companies must keep prices competitive compared to current oil companies by depending on Mother Nature to produce enough natural feedstock.
Additionally, research and development costs remain relatively high. Biofuel firms need to work constantly to tweak existing technology and create new processes. Government incentives help support this industry, but dependence on political regulation could leave some companies with too much yeast and not enough fuel.
Power for my portfolio?
Companies with strong track records, the ability to scale production as demands change, and technology that provides a clear-cut advantage will see shares take off in the long run. Renewable Energy Group and BP are widely diversified across the energy sector, making these companies better able to adjust as the industry changes over the next decade.
Any major shift in the energy industry (like oil prices or government policy changes) could throw off smaller companies. Getting in early will provide huge rewards if you're willing to hang around long enough -- they could just rocket your portfolio to the future. However, if you're not sold on the future of renewables and still want to add quality energy stocks to your portfolio, then you ought to look at the "Only Energy Stock You Will Ever Need." This special free report is immediately available -- but get it now, because it want be around much longer.
Fool intern Marissa Linden holds no position in any of the companies mentioned. The Motley Fool owns shares of Solazyme. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.