Over the past couple of months, solar energy stocks have been hit particularly hard by the downturn in the market. Some of these companies are trading at prices not seen since the depths of the financial crisis. Trina Solar, Suntech (NYSE: STP), and JA Solar (Nasdaq: JASO) are trading at single-digit P/Es, while First Solar (Nasdaq: FSLR) is trading at less than half its all-time high. In an industry heralded as a growth mecca, these P/Es tell a different story -- the story of an industry that seems poised to disappear. So what is going on with solar?

The fear
The major concern has to do with European countries discontinuing their feed-in tariffs. Feed-in tariffs -- government subsidies that make solar energy generation competitive with other forms of electricity -- have traditionally been one of the major drivers of growth in the solar industry. Uncertainty over solar support in Germany has caused particular concern. Instead of eliminating feed-in tariffs altogether, they were simply decreased; a far less drastic outcome than many investors feared.

Additional fears come from falling solar module, wafer, and polysilicon prices (all parts of the solar value chain) and have investors worried that margins will shrink and crush profitability. Meanwhile, Chinese solar companies have been hit particularly hard because of the fear over a slowing Chinese economy and reverse-merger fraud.

Overblown concerns
Quite simply, I think these fears are overblown. In Germany, feed-in tariffs are still in place, albeit lower than before, and will still be a driver of growth for solar demand. And the drop in solar module prices from over $3.50 per watt to a mere $1.37 per watt for some companies has helped move solar to a more competitive position even without large subsidies.

Furthermore, support for solar from other parts of the world remains strong. In India, the government has committed to generating 20 gigawatts of electricity with solar by 2020 and China appears to be slowly getting into the solar energy generation game. All across the world, in fact, new subsidies have been popping up, from California and Pennsylvania to South Africa and Uganda. While not as beneficial as some of the European subsidies, they are good signs for future growth.

In addition, net income, operating cash flows, and cash on hand -- key metrics for determining the shape of a solar company -- don't paint the dire picture that the stock prices do. Even if overall sales were to decline in the next couple of years, many of these companies would still sit at very comfortable valuations.

Company

P/E

Market Cap

Net Income

Operating Cash Flow

Cash

First Solar 18.93 $11.43B $664M $705M $765M
Suntech 5.84 $1.42B $248M ($30M) $1.01B
JA Solar 3.01 $914.9M $266M $194M $364M
Yingli Green Energy (NYSE: YGE) 5.83 $1.4B $210M $379M $986M
ReneSola (NYSE: SOL) 2.32 $458M $168M $403M $347M

Significant value
Valuations like these should make most value investors drool. Even if there was a large decline in demand, these companies are well-positioned to weather this drop and still maintain strong revenue and cash flow positions. Based on the current valuations, declines in the solar industry are already priced in.

Furthermore, while the short-term growth story may be less compelling due to expectations of lower solar module sales for 2011, the actual potential in this industry has increased dramatically. The cost of producing solar energy continues to decline, meaning that solar energy is getting closer to grid parity (cost competitiveness with other forms of electricity generation).

In a couple of years, solar energy is expected to be competitive without subsidies in expensive energy markets and will continue to become competitive in more markets as solar prices decline. Until then, the feed-in tariffs and other subsidies still in place will help stimulate demand in many countries, allowing solar companies to maintain consistent sales and profitability until demand driven by cost picks up.

The Foolish bottom line
While many investors see the short-term gloom surrounding solar energy, I see the sun shining over the horizon -- the promise that these companies hold as they creep ever closer to competing on par with fossil fuels. Eventually, investors will understand the realistic potential that solar energy can have on global energy production and again begin investing in these companies. First Solar, Suntech, and ReneSola have developed significant production and cost leadership positions over the past few years and should lead the way going forward. I believe these companies, along with innovative startups, will lead the solar movement to greater profits.

Reza owns shares of ReneSola. Motley Fool newsletter services have recommended buying shares of First Solar.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.