The solar industry has emerged as a serious threat to the traditional energy industry, and for investors who pick companies that win in this business long-term there's a huge opportunity for profit. Below I'll outline the three best stocks to invest in the solar industry with a diverse group of risks to expose different investors to different parts of the industry.

The core of SunPower's business is built around a solar cell that's the most efficient in the industry. Image source: SunPower.

Most diversified solar stock
Investing in the solar industry today is all about risk. There's interest rate risk, technology risk, public policy risk, and business model risk just to name a few. As the industry has evolved over the last decade the winners have gone from low cost module makers (First Solar) to finance innovators (SolarCity) to project developers (SunEdison) with many painful missteps along the way.

As the solar industry has evolved winners have come and gone but one company has remained relevant over the long-term. That is SunPower, and the core of its competitive advantage is a market leading solar panel that is more efficient than competitors.

This efficient panel makes SunPower competitive in everything from the smallest residential solar installations to the largest utility scale projects, where it is one of the world's largest project builders. The technology advantage SunPower has also leads to higher margins as a result of creating a premium product that can generate more energy in a smaller space.

For investors wading into the solar market, SunPower offers a diverse play in multiple markets with a product that offers a discernible technology advantage. It won't grow as quickly as other companies but, in my opinion, it's the lowest risk company in the industry.

First Solar has a long history of building solar projects, which is now the core of its business. Image source: First Solar.

Best legacy solar stock
One of the former leaders in the solar industry is First Solar (FSLR 0.71%), which just a few years ago commanded 50% gross margins because it made thin-film solar panels at a cost far lower than competitors. But costs for silicon based solar panels have plunged over the last five years, making First Solar's cost advantage moot given its lower efficiency than silicon.

What First Solar does well today is build large solar plants, something it has long been extremely efficient at. Today, its business is valued almost entirely based on the projects it has in its pipeline rather than the panels it makes, which are arguably reducing the company's competitiveness.

As a project builder alone First Solar would be worth adding to your portfolio, but long-term there is significant upside if the company can improve its technology. Management has outlined a roadmap to bring the company's module efficiency to 17.2% in 2017, up from 13.4% in 2013. That's a big jump, but if they can do it First Solar will lower cost per watt installed and improve its project cost structure dramatically.

SolarCity has helped create a new market in distributed solar in the U.S., as you can see here with a commercial rooftop project. Image source: SolarCity.

Best up and coming solar stock
The third stock in my list of solar stocks to buy is SolarCity, the residential and commercial solar finance and installation company. SolarCity has made a business of making solar energy accessible to consumers and building owners and it's well on its way to installing 1 million systems by 2018. On the way, it has vertically integrated its business to lower costs and is now near $3 per watt for installation and overhead costs, what a utility scale project cost to build just a few years ago.

SolarCity is the highest risk of these stocks in part because it comes with a high price and many risks to its business model (interest rates, customer default, increased competition), but it also has the highest potential. The company that can create a durable advantage in residential solar has a nearly limitless market and SolarCity has a huge lead over competitors on that front.

If you jump into SolarCity prepare for a bumpy ride, but Elon Musk and team have proven the ability to disrupt distributed solar and continually improve their market position. That's no small feat when you're the biggest target in a piece of the solar industry everyone wants to be in.