Here's an arcane and unusual money-making idea from a pair of stock brokers: light bulbs.
It may seem like one of the most boring investment pitches going. But Credit Suisse and Canaccord Genuity are both convinced that high tech lights made using LEDs are poised to become the next big thing, according to recent reports by the firms.
"Our bullish stance on the market and our belief that the field is relatively open suggests there can be room for several companies to define their niches," Credit Suisse said in a recent research report on the sector. It's initiated coverage on LED maker Cree Inc. and Veeco Instruments Inc., a maker of LED manufacturing equipment, both with neutral ratings.
Short for light emitting diodes, LEDs are related to computer chips, but are designed to emit light.
They're an intriguing innovation because of their long lives and high energy efficiency. They use a mere one-fifth the energy of old fashioned incandescent bulbs, and are so durable they'll run for as much as 70,000 hours, or nearly eight years of continuous operation. With that kind of lifespan, people may never have to replace a burned out light bulb. (Neither brokerage would comment on what happens down the road when the consumer market is saturated with bulbs that seldom wear out.)
The bulbs last because they don't have filaments or electronic components that readily burn out.
Credit Suisse says LEDs could make a huge dent in the 20 per cent of electricity now used to run lighting, if the sockets with inefficient bulbs, which total about 60 per cent, were replaced with the new technology.
LEDs also have a warm colour and don't have the flickering and cold blue hues that make some people dislike fluorescents. Unlike compact fluorescent bulbs, a competitor in the energy efficiency department, they have the added benefit of not containing toxic mercury.
Up until now, LEDs haven't been a huge business because applications have been dominated by the relatively small uses in televisions, hand-held devices and automobiles, rather than the far larger market for residential, commercial, and industrial lighting.
The reason is cost. While incandescent bulbs often go for $1, LEDs go for $20 each, making the huge upfront cost difficult for most people to justify, even with the energy savings. Those buying the lights now – often in commercial or apartment settings, do so mainly because their long lives mean significant savings in labour and maintenance.
But analysts are betting that rapid price declines for LEDs, now running at about 10 per cent per quarter, will soon make them much more affordable. Credit Suisse projects that the cost per bulb could be down to a more competitive $3 to $4 by 2014, leading to a tipping point for widespread adoption, given their compelling energy saving advantages.
Meanwhile, Canaccord estimates that LEDs, currently in less than 1 per cent of all sockets, will have anywhere from about half to three quarters of the world lighting market by 2020, driven by the more affordable prices that it also foresees. It estimates consumers could spend upward of $155-billion (U.S.) on them by 2020.
Despite strong demand projections, the sector can be treacherous for investors. Like the companies in other emerging businesses with good prospects, many stocks have had explosive runs, only to falter, or have already had large moves.
SemiLEDS Corp., a manufacturer of high brightness LED chips, went public in December at $17 a share. The stock then popped to more than $30, but has since cratered.
Veeco has also taken investors for a wild ride. It fell to less than $4 a share during the 2008-09 market panic, only to come roaring back to $57.67 this spring, before the recent market correction.
And while LEDs might be flying off the shelves in 2015, companies have to survive in the meantime with today's more modest acceptance. The stock price of CRS Electronics, a Welland, Ont.-based maker of LED replacements for halogen bulbs, has been treading water for this reason.
Canaccord has two companies it recently rated "buys:" Acuity Brands, a lighting fixture maker, and LED bulb maker Nexxus Lighting. It says Acuity is a good long-term bet because of cost cutting that should boost its bottom line, while Nexxus stands to benefit from a deal with retailer Lowes to carry its light bulbs.
LIGHT BULB BASICS
Incandescents
These are the standard, screw in bulbs invented more than a hundred years ago and found in most homes. They work by heating a filament, which in turn emits light. Only about 10 per cent of the electricity used in them is converted into visible light, the rest dissipates as heat, making them the most energy hogging form of lighting. Bulbs are low cost, but wear out fast, needing to be replaced after 1,000 to 2,000 hours of use.
Fluorescents
They're relatively energy efficient, using about 75 per cent less energy than incandescents, but many people dislike the harsh bluish light they usually produce. These bulbs also flicker and are hard to work with dimmers. Compact fluorescents, bulbs with a telltale pig tail look, last 10,000 hours or more.
Light emitting diodes (LEDs)
These work using technology similar to the computer chip. They're the most miserly in term of energy consumption, using about 80 per cent less than incandescent bulbs. Because they don't have heated filaments that are subject to burning out they have extremely long lives, estimated at up to 70,000 hours. They're relatively expensive, often 20 times more than incandescents and three to four times the price of a compact fluorescent bulb.