The never-ending quest to produce energy from something other than fossil fuels has provided Wall St. firms and investors the challenge of constantly trying to determine which companies are legitimate. After years of boom and bust cycles, the solar sector has finally purged some of the industry excess and may be poised to become relevant again. That is the take of Citigroup Inc. (NYSE: C) in a fresh research call. The proverbial Wall St. question will emerge, “Is it different this time?”

Citigroup is launching an ambitious global solar sector research team that will have analysts in the United States, Europe and Asia. While the near-term picture for the industry and the sector remains price driven and very volatile, in the longer term the analysts see every reason to remain positive. The sector will continue to exhibit growth, driven by underlying economics and fuel diversity, with legislatively driven spending still present but taking more of a back seat.

The solar research team at Citigroup started four solar stocks with Buy ratings, two at Neutral and one with a dubious Sell rating. We are seeing real gains on this on the select names. The stocks started with Buy ratings are:

Sunpower Corp. (NASDAQ: SPWR) is not only their top-rated stock but it is added to the U.S. High Conviction Buy list (top picks live). The target price is $12, though the consensus Wall St. estimate is only $5.50, which is less than current trading levels. Sunpower is up almost 5% today at $8.40.

MEMC Electronic Materials Inc. (NYSE: WFR), a former high flyer, has a price target at Citigroup of $5.40. The consensus estimate is at $4.00. Surprisingly, this battered solar (and chip) wafer-maker is up only 1%.

First Solar Inc. (NASDAQ: FSLR) is yet another former high flying solar stock, and the Citigroup price target is $41, while the Thomson/First call estimate is at $24.00. Shares are up more than 4% and back above $30 so far.

Advanced Energy Industries Inc. (NASDAQ: AEIS) was given a price target of $20, and that is substantially higher than the consensus of $13.50. This one is up almost 4.5% at $16.60 on the news.

Citigroup rates Trina Solar Ltd. (NYSE: TSL) and Yingli Green Energy Holding Co. Ltd (NYSE: YGE) at Neutral.

Suntech Power Holdings Co. Ltd. (NYSE: STP) was initiated with the Sell rating. Its shares are getting hit with a drop of more than 3% to $1.53 so far today.

One of the main thesis points for the Citigroup team is that while solar may have reached socket parity in many global regions at the residential level (socket parity refers to solar panels offering cheaper electricity than power from the grid), utility scale parity is expected to advance over the next few years. Besides pure economics, the need for utilities to diversify their fuel mix is crucial to insulating them from volatility and the likely upward movement in gas prices over the longer term, a need that was well-documented as they surveyed electric utilities in the United States. Indeed some are already choosing to build solar farms instead of gas super-peaking plants based on pure economics. Overall, they continue to view solar and gas as complementary rather than mutually exclusive generation sources.

Classifying the solar industry is a difficult task, as it displays characteristics of both a high-tech growth industry, as well as a traditional cyclical industry. Understanding the interplay between these two dynamics is the key to investing in the sector, particularly from a timing perspective. Historically, much of the growth has been attributed to legislative mandates driving solar spending — this is set to change. That is particularly the case with U.S. politicians having a very bad taste in their mouths after the Obama administration’s green energy stimulus program failures like Solyndra and Abound Solar. Growth will now be driven by economics and fuel diversity moving forward.

Many of the U.S. utilities the Citigroup team surveyed have highlighted the need to diversify into other generation sources. It is well understood that natural gas prices will not stay depressed forever. So besides pure economics, from a utility perspective, the need to diversify is crucial to remove the volatility and eventual upward movement in gas prices over the longer term. It is also important to remember that many U.S. utility companies are at a point where they are upgrading and changing their infrastructure. If solar becomes a solid choice for power generation, the sheer size of the utility industry in the United States and around the globe could reignite growth.

The solar landscape may slowly be changing, and the fact that the utility industry views solar as a viable alternative generation source is a powerful growth angle. While the high volatility associated with the industry and its pricing may very well keep a lid on a return to over exuberance, the obvious need for less polluting fuel sources may very well propel solar back into the spotlight. The question from investors will still be: “Is it different this time?”

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