After the world's leaders, scientists and agitators left Copenhagen in carbon-emitting aircraft, a group of ASX alternative energy stocks may still have their day in the sun.

While the cynics may argue that the only thing that came out of the UN summit was more 'hot air', the decisions made at Copenhagen do map out a process of sorts for the world's advanced economies to adopt cleaner industrial models. Although details are still hazy, what's clear is that alternative energy stocks are set to outperform.

For a sector that's seen more than its fair share of irrational exuberance, investors still need to be careful in equity selection. Over the past five to ten years there have been plenty of companies that have promised technological breakthroughs, or exciting new sources of clean power, but have failed to deliver. Whether one examines coal seam gas, geothermal, carbon capture, the bio-fuel industry or wind and solar power, there have been several market disgraces for every success. For a conservative investor, it's usually safer to invest in companies that have existing operational cash flows and confirmed or proven contracts or resources.

Though more difficult to find, currently there are a number of financially healthy companies with exposure to the alternative energy space ranging from natural gas to uranium. These include Beach Petroleum (BPT), Energy Resources of Australia (ERA), Rio Tinto Limited (RIO), Origin Energy Limited (ORG), Oil Search Limited (OSH), Santos Limited (STO) and Woodside Petroleum Limited (WPL). While some will appear unusual on a list of alternatives energy stocks, BPT, ORG, OSH, STO and WPL are however exposed to natural gas and alternatives and this exposure somewhat mitigates the negative effects that higher carbon prices, post-Copenhagen, may otherwise have on margins.

Natural gas is a commodity and is seen as an interim fuel source between carbon-intensive and green energy sources. This has seen gas stocks rise sharply in the last couple of years. While for many, pricing in future upside is rational, in some instances this has gone too far. Australia does have the potential to become a major LNG exporter and the demand for gas in the near term is expected to remain robust, but the fundamental economics of several projects - large and small - could be dramatically undermined by competition from other suppliers such as Qatar, and potentially Russia and Iran.

Technological change can render proprietary techniques and patents obsolete, and until new energy sources can compete directly with traditional base load suppliers without subsidies, the investor is leaving a stock's valuation up to the bureaucrats and politicians. That said, this has been favourable in recent times as a number have received grants to aide their research efforts.

Uranium - reformed criminal?

What excites us is uranium. As with gas, there are commodity price risks, but uranium spot prices, which account for 15 per cent of global supply, are historically low, especially when compared to LNG spot prices. As carbon trading and pricing models kick in, and as more nuclear power stations across the world are built, spot and long-term contract prices in our opinion can only rise further.

Nuclear power, which forms 95 per cent of uranium demand, leaves many with mixed feelings. The memory of Chernobyl has resulted in many viewing nuclear fuel as dangerous and - despite low carbon emissions - dirty. Certainly nuclear waste is a problem that policymakers and industry are still grappling with, but safety standards have improved dramatically. The World Association of Nuclear Operators says that industrial accidents at the world's 436 nuclear plants have dropped over 80 per cent in the last 20 years.

Australia has 27 per cent of world's uranium reserves according to the US Geological Survey and opposition to nuclear power and uranium mining remains strong. Ironically this can be a good thing for uranium companies if it means higher supply-driven prices for existing producers. Indeed, for as long as new mining provinces such as Queensland remain offline, the profits enjoyed by companies like ERA, which mines in the Northern Territory, will remain.

Whether or not opposition to uranium mining in Australia continues, on the demand-side other countries are building, planning and examining new nuclear power stations. Perhaps most tellingly some of those countries are major producers of oil and gas, notably Indonesia, the United Arab Emirates and Iran, which, perhaps more worryingly, has also been accused of pursuing a nuclear weapons program.

Where will the demand come from?

America will become the largest generator of nuclear power by 2030, according to the US Department of Energy, moving from second place to the European Union. By 2013, America's supply of decommissioned Soviet nuclear warheads will also conclude. Cap-and-trade legislation currently before the US Senate could also spur nuclear demand.

The Clean Energy and Security Act of 2009, or the Waxman-Markey Bill, could more than double nuclear power by 2050, Environmental Protection Agency analysis predicts. Unlike in previous years, nearly all of the fuel for that increased capacity will come from the primary market, of which Australia presently contributes 23 per cent, according to UBS estimates.

China's continued economic growth is another major factor working in uranium's favour. According to a recent report by the World Nuclear Association, China has 11 nuclear power reactors in operation, which provide 3 per cent of the country's electricity needs. A further 20 plants are under construction and more are planned to increase the country's capacity six-fold by 2020. This could be set to increase further if China bows to pressure to make good on commitments to reduce levels of 'carbon intensity'.

In India, nuclear power is expected to triple between 2020, when 20,000MWe of capacity will be online and 2032, when 63,000MWe of capacity projected. By 2050, India aims to have 25 per cent of its electricity needs supplied by nuclear power. Already America has backed India's civilian nuclear program and Australian industry is pushing for the government to lift its ban on exporting uranium there. Nuclear power capacity is also predicted to rise in Europe, South Korea and Japan and according to the World Nuclear Association, an industry lobby, capacity worldwide could increase ten-fold in 50 years from today's nuclear capacity of 370 gigawatts.

Stocks to watch

In terms of stocks selection, unfortunately there are not too many options for investors looking for a producer in the sector. Most are small and emerging exploration companies like Extract Resources Ltd (EXT), Arafura Resources NL (ARU), Mantra Resources Limited (MRU), Deep Yellow Limited (DYL), Bannerman Resources Limited (BMN) and Toro Energy Limited (TOE). However, these investors will also have to trade the most risk for these stocks. These stocks do not currently meet Lincoln's Number One Golden Rule for successful investing, and that is, being exposed to low levels of financial risk given the majority are not profitable and therefore not generating any cash flow. As a result they are not currently on Lincoln's preferred list of stocks.

With blue chip stocks such as Rio Tinto Limited (RIO) and BHP Billiton (BHP), exposure to uranium is diluted among other commodities, though may be an option for those who want the exposure without the risk. However, as the events of the credit crunch have amply demonstrated, big companies like RIO are by no means immune from share price falls.

Luckily however, a happy medium exists, and again operating, profit-making companies like Energy Resources Australia (ERA) stand out and to a lesser extent Energy Metals Limited (EME). ERA is a Stock Doctor Star Stock and is in 'Strong' Financial Health, with an annualised return on assets of 29.68 per cent in the year to June, plus 2009 earnings per share growth of 227.47 per cent. Its Ranger mine, east of Darwin, produces 10 per cent of the world's mined uranium.

EME has moved into a position of financial strength in the last six months and is currently rated as having 'Strong' Financial Health, although Lincoln will be looking to see its next set of reported earnings and the consistency around this. With a market cap of $109.7 million and a daily trading volume of only around $22,000, it is a stock that flies under the radar of most analysts. A 70 per cent proportional takeover bid for the company by China Guangdong Nuclear Power Group illustrates that someone however has been watching.

The good news is that the bid's proportionality still leaves room for other shareholders to buy in. On the other hand however, EME effectively trades at a PE multiple of over 1,000 so don't expect to find a bargain. Furthermore, and like other smaller uranium stocks, EME trades at a high enterprise value to resource ratio (EV/lb) - a popular albeit debatable method of ascertaining value.

Overall investors will need to be careful in their stock selection when attempting to identify a uranium play to consider investing in. Though there is significant long term 'potential' for the sector, it is important to remember that most participants are 'currently' either overvalued or not making a profit.