First Solar shares surged today after Goldman Sachs analysts upgraded the stock but downgraded their view on the solar sector in general. They highlighted a few key investment themes they see happening within the solar sector in their Jan. 5 report titled “Americas: Clean Energy: Solar” and named First Solar as one of their top picks in the sector.

First Solar

Solar stocks downgraded to Neutral

Analyst Brian Lee and his team noted that despite U.S. solar stocks’ tremendous outperformance at the end of 2015, they still “modestly underperformed” the market in all of 2015. On average, they see 16% upside within the solar stocks they cover, which isn’t much, so they have downgraded their solar coverage universe from Attractive to Neutral. Within their coverage, they are selectively biased to certain names like First Solar.

On other big names, like SolarCity, they remain on the sidelines as they await execution or a major catalyst to come along.

What to look for in the solar sector

The Goldman Sachs team sees three main themes for investors to seek out when considering which solar stocks to invest in. The first on the list of items is growth, as solar stocks suddenly increased in value toward the end of December. They said investors now appear to be appreciating growth prospects more following that sudden increase. They suggest that EBITDA and CROCI should be considered the most important metrics when considering growth prospects.

Second, they said that balance sheets are extremely important right now, as is cost of capital. Lee and team pointed out that the solar business model is now at the most financing intensive level it has ever been at. In 2015, the sector witnessed record levels of debt and equity raises. Also the cost of capital is on the rise for the first time through rising interest rates.

Investment tax credit keeps solar stocks intact

And finally, they mention the investment tax credit. In 2015, the concern was that solar companies would be greatly impacted by the phasing out of the credit. After all, if consumers and businesses don’t get a tax credit to install solar panels, they are less likely to do it. The phase-out had been scheduled to start at the end of 2016 with a bump down from the current 30% to 10%, but last month Congress voted to extend the tax credit for solar through 2019, creating a tailwind for solar stocks toward the end of 2015.

The Goldman team said the “investability” of solar stocks remains “intact” now that lawmakers have extended the tax credit, but because of the valuation reset, they don’t expect the extension of the tax credit to provide much of a tailwind for solar companies this year.

First Solar Upgraded To Buy

In addition to highlighting which keys to look for among solar companies, Lee and team listed their favorite and least favorite solar stocks. They called First Solar the sector’s bellwether and said that it’s back on top this year. They expect the firm’s shares to outperform this year and see 50% upside to their new price target of $100 per share.

They said First Solar checks all the major boxes for 2016 with a “best in class balance sheet” and help from the renewed California Renewable Portfolios Standard (net metering) for solar installations and the extension of the investment tax credit. Among the catalysts they see for First Solar this year are upside to earnings per share, price to earnings multiple expansion and “capacity adds.”

First Solar shares climbed by as much as 7.54% to $71.75 per share during regular trading hours on Tuesday.

Solaredge Technologies a “best growth idea”

The Goldman team likes Solaredge Technologies because of the firm’s combination of rooftop solar with batteries. They added it to their Conviction List and said they see 46% upside to their new target price of $41 per share. They called the solar plus battery combo their “best growth idea.” The catalysts they see include Tesla Energy, the EV manufacturer’s solar power storage system, new manufacturer wins and earnings per share beats.

Shares of Solaredge climbed by as much as 457% to $29.28 per share.

Looking for execution at SolarCity

Lee and team remain Neutral-rated on SolarCity, although they bumped up their price target from $42 to $59 per share following the rerating in December. They noted that the company was the best performing stock at the end of 2015 and that the ITC extension was quickly priced in after the stock tanked following the third quarter earnings disappointment. They added that SolarCity shares recovered faster than they expected they would, almost doubling between mid-November and the end of the year.

They believe that most of this rally was due to tailwinds within the sector, like the favorable preliminary outcome in the net metering debate in California and the surprise ITC extension. The Goldman team does see SolarCity as one of the biggest beneficiaries of the ITC extension but think this is “well appreciated” in shares already since the recent rally.

They added that execution is the most important thing to watch with this company and that costs and cash flow will provide important indications about execution. They said two of the most important benchmarks for investors are cost cutting and balance sheet visibility for this year. They are encouraged by the recent disclosures about levered portfolio cash flows, but they want to see SolarCity move toward a more traditional cash flow structure and positive EBITDA by late 2017 to early 2018.

The next catalyst they see is visibility into alternative monetization strategies. Shares of SolarCity slumped on Tuesday, falling by as much as 4.52% to $50.46 per share.