Some clean technologies will be very big, and many won't. But for investors, this may not matter if predictions of a clean-tech bubble turn out to be true. Because in bubbles, quality-and the arduous security analysis that uncovers it-don't matter. While a bubble is inflating, everything, no matter how pie-in-the-sky, goes up. And when a bubble bursts, everything, no matter how solid, goes down. In 1998, for instance, time spent comparing Amazon.com and Cisco with the dozens of other tech stocks flooding the marketplace was wasted because they all soared. And in 2000, research was also wasted because they all tanked. If a 1990s-style bubble is coming, then our job as investors is pretty easy: load up on a random selection of clean-tech stocks and prepare to sell after they rise by an arbitrary but extremely large amount. But if clean tech is not destined to be a bubble-or if it's going to be a different kind of bubble-then we face a more interesting analytical challenge.

So let's start by recognizing that a bubble is more than just a big increase in the valuation of some narrow sector. An asset's price can soar for legitimate reasons and still be fairly valued. For something to be a bubble, a rising price must to be accompanied by two things:

1. Traditional business practices being tossed aside in favor of "innovations" that look suspiciously like scams but, in the heat of the mania, are embraced by everyone still on the field

2. Regular people making fortunes doing things that professionals used to find difficult

During the housing bubble, an example of the first was zero-down, adjustable-rate mortgages, and an example of the second was landscapers and taxi drivers quitting their jobs to become condo flippers. Housing was clearly a bubble.

So will clean tech follow the housing bubble/dot.com script? Well, in early 2008, money was flowing freely. Venture capitalists were funding a lot of untested technologies, and many solar stocks are tracing bubble-like arcs. On the other hand, there are fundamental differences between clean tech and the dot.coms. For one thing, in the 1990s, the Internet was uncharted territory. It was being created before our eyes and seemed to have unlimited potential. Because there were no metrics against which to value a new idea like America Online or Yahoo!, analysts (no doubt under pressure from investment bankers down the hall) simply made up measures like "eyeballs" and assigned them arbitrary, sometimes astronomical values. The result was a disconnect between stock price and earnings potential that made all manner of bizarre behaviors possible.

Clean tech, on the other hand, addresses the needs of existing markets. Electricity is already being produced and valued in the real world, so a new power source has to meet an existing benchmark to be taken seriously. That's why wind and solar, which are cost competitive with existing power sources, are doing so well, while fuel cells, which are far more expensive than internal combustion engines, are not. And some of the major clean-tech players are large, well-known companies. Sharp is the largest producer of solar panels, while General Electric is a leading maker of wind turbines and just about everything else.  ....read more