Something quite extraordinary has been happening over the last three months: Solar stocks are back.
Most survivors of the shakeout from the last few years have gained in the range of 40 to 60 percent, with the TAN ETF up 58 percent and the KWT ETF 66 percent higher. The U.S. industry's "bell cow," First Solar, trails the field with a gain of 47 percent.
The leader by far is SunPower, which has soared 230 percent over the last three months. After falling as low as $3.71 last summer, the company, which is majority owned by France's Total, now trades at $13 per share.
The reason for SunPower's relative success, according to Insider Monkey, is efficiency. Its panels are up to 21 percent efficient at turning solar energy into electricity. That's almost double the average for First Solar. Its balance sheet is also fairly good for a company of this type, with about half as much cash as debt. The cash balance has been rising steadily since Total moved in.
Like its Chinese rivals, SunPower uses polysilicon in its panels. It generates most of its revenue from U.S. projects on a utility scale, although its website is filled with happy homeowners. It adds microinverters to its panels, lowering installation costs, and says it has cut costs per-watt by 25 percent.
SunPower has enjoyed huge benefits from its link with Total, which has let it keep improving in efficiency despite continuing losses. The rest of the industry is coming back on a wave of new demand.
New markets are opening, like Argentina, according to Bloomberg, and the Middle East, according to Nanowerk. As costs drop, more U.S. businesses find they can afford panels, which create power where it's used. Some, like a nursery in Ft. Worth, claim they can pay for the investment over three years from electricity savings, writes the Ft. Worth Star-Telegram.
The financing market has also improved, as companies like SolarCity, which had its IPO in the fourth quarter of 2012, scale into the commercial market. Honda dealerships in California say that their SolarCity-financed panels deliver power for less than the cost of the state's grid, according to Marketwatch.
The cost of solar power fell below that of power from the electrical grid in Hawaii some time ago. Now this "grid parity," sometimes called "crossover," has reached the mainland and begun spreading across the country. There are several ways in which you can reduce costs — panel efficiency, manufacturing costs, financing costs, installation costs, and permitting costs. It's not just about the cost per watt delivered from the factory, but the total installed cost per watt.
Investors are probably wondering whether all this growth is sustainable. My own guess is we're probably looking at one more leg down before costs are driven decisively below those of grid energy. Once solar power becomes cheap power there is no stopping the solar boom, any more than the minicomputers of the 1970s could stop the PC.
My own estimate is we're still two to three years away from that point in most of the U.S., which doesn't yet account for the cost of its carbon waste. Until grid parity is general here, the best investments will be in companies that combine a strong export market with high efficiency, like SunPower, and companies that specialize in finding buyers, like SolarCity.
—By TheStreet.com Contributor Dana Blankenhorn
At the time of publication, Dana Blankenhorn had no investments in companies mentioned in this article.