2013 is poised to be an exciting year for alternative energy investors. Despite the conflagration solar had in 2012 we see opportunities there, as well as in wind and energy efficiency. This article also reveals why 2013 is shaping up to be a good year for the stock market in general, and alternative energy in particular. Solar If 2011 was a bad year for solar– with the bankruptcy of Solyndra, tariff wars with China, and other damaging events– then 2012 was a disaster. The Ardour Solar Energy Index (SOLRX) lost 35% in 2012. This is on top of a blistering 66% loss in 2011! The chart below shows the change in net profit margin from 2011 to 2012 for the largest solar companies. Performances were not stellar in 2011, only 12 out of the 13 companies turned a profit and the average net profit margin was just over $5 million. In 2012, however, only one of the companies posted a tiny profit, and companies averaged over $28 million in losses. I could throw up similarly downbeat charts for other measures of financial health, including earnings per share ((EPS)), price to book ratios, and sales growth. (click to enlarge) Even analysts’ projections for solar earnings have come way down. In 2011, the average EPS estimate for these large solar companies was a meager 0.57 one year out. In 2012, analyst EPS estimates dropped to a very negative average assessment of -1.72. Though depressing, this reality jived with my forecast at the beginning of 2012, where I predicted another year of rough sledding for solar stocks. Despite the gloomy statistics, financial and energy analysts may look back at 2012 as the turnaround year for solar. Many individual companies (particularly the upstream photovoltaic (PV) manufacturers) are facing economic realities of oversupply and falling PV prices, which will ultimately lead to bankruptcies or mergers. According to IHS iSuppli Market Intelligence, the number of PV suppliers is expected to plunge by 70% in 2013. Those left standing, however, will profit immensely, since solar is a white-hat energy source that is likely only at the beginning of its long-term growth story. It is very hard to pick winners and losers in this environment, so a broad collection of solar stocks is likely the best route for adventurous investors to take from here. One good option is a Mutual Fund (MF) or Exchange Traded Fund ((ETF)) concentrated in solar. For MFs, I currently like Guinness Atkinson Alternative Energy (GAAEX). Market Vectors Solar Energy ETF (KWT) also looks like a good value. Wind One of the fastest growing clean energy sectors is wind. The chart below shows projected growth of installed wind power in the three largest markets-the EU, North America and China. In 10 years, the amount of installed wind could more than triple from current levels, and in 20 years it could grow by 8 times! Moreover, this chart does not even include other important growth regions around the world. (click to enlarge) Another exciting and dynamic area in renewable energy is offshore wind, and the Obama administration is starting to move forward on this. According to the U.S. Department of Energy (DOE), the generating potential of offshore wind in areas with less than 100 feet of water equals the entire generating capacity of the U.S. electric system! Bloomberg reports that at the beginning of January, the Bureau of Ocean Energy Management started to gauge interest in offshore wind leases for 127 square miles off the coast of New York. Also, in 2013 the administration plans to conduct competitive lease auctions off the Massachusetts coast. Since there are very few publicly traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in ETFs. Two good examples are First Trust ISE Global Wind Energy Index Fund (FAN), and PowerShares Global Wind Energy Portfolio ETF (PWND). Though these funds were down between 15% and 20% for 2012, they have bounced back nicely since their July lows. In fact, both funds are up in the 33% range since that time. Energy Efficiency One of the most promising investment areas for 2013 may come from the area of energy efficiency. From an economic standpoint alone, smart efficiency measures that businesses and individuals can deploy have a short payback period, and many can bank immediate cost savings. In 2012, Fidelity Investments featured energy efficiency as a “compelling investment opportunity.” According to Fidelity, global power needs are expected to rise 50% in the next 25 years, creating an increasing market for more efficiency lighting, engines and buildings. Energy efficiency companies we tracked have done extremely well in the past three months. Almost three quarters of stocks have been gainers, and 45 companies, or fully 20% of those energy efficiency businesses covered, have gained over 25% for the quarter. Companies I like as long-term investments in energy efficiency include A. O. Smith Corp. (AOS) and Tetra Tech, Inc. (TTEK). AOS is in the commercial and residential water heating business, which has a strong balance sheet, excellent sales growth, reasonable debt levels, and its stock is considered undervalued in the high 60 to low 70 price range. TTEK is an engineering and management firm whose services include water resources, energy efficiency and carbon management. It is a very well-managed company with excellent free cash flow, but its stock is considered overvalued at current prices. If it dips to the mid to low 20′s, TTEK would merit a look.