Solar's Outlook Gets a Bit Sunnier

Although the financial services industry remains on the front burner, the energy industry is still not far from many investors' thoughts right now, as this week's sudden oil spike showed.

To partially wean us off of oil, gas and coal, government support of alternative energy will prove vital, at least until technology improves enough that wind and solar can be cost-competitive on a stand-alone basis.

That's why last night's Senate extension of tax credits for solar power installation (until 2016) is so vital. The bill, HR6049, which was initially proposed in the spring, passed by a 93-2 vote in the Senate.

The key industry players badly need to assure investors that they will not simply be a flash in the pan. The House still needs to sign off on the bill as well. It is also worth noting that the $18 billion package is completely offset by the reduction in benefits to the oil and gas industry.

Shares of Evergreen Solar (ESLR - commentary - Cramer's Take), First Solar (FSLR - commentary - Cramer's Take), SunPower (SPWR - commentary - Cramer's Take) and Energy Conversion Devices (ENER - commentary - Cramer's Take) are all up 5% to 15% in Wednesday trading.

Shares in the group have soared and plunged, depending on broader sentiment, as these stocks carry very high betas. Yet institutions have largely placed their bets on First Solar, which is the only stock in the group closer to its 52-week high than its 52-week low, and which is valued at a lush 13.3 times projected 2008 sales on an enterprise value basis.

Notably, as the accompanying table shows, the China-based solar plays such as JA Solar (JASO - commentary - Cramer's Take) and Yingli Green Energy (YGE - commentary - Cramer's Take) sport the lowest valuations, in large part because of the absolute decimation of the broader Chinese market.

But investors need to stay focused on the fact that industry growth can stay above 25% for the next three to five years, as the legislative backdrop is likely to become yet more favorable. Both presidential candidates have expressed a great deal of support for an expansion in credits and subsidies for alternative energy.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.