Solar stocks took another drubbing yesterday, this time on word that Italy's debt had been downgraded by S&P. If it isn't changes to a feed-in tariff, it's economic concerns, or falling oil prices, and now … it's debt ratings?

The downgrade and solar
Does the Italy downgrade really have anything to do with solar stocks? Ratepayers essentially pay for feed-in tariffs, and Italy's government finances have little to do with solar, save for setting policy and providing other incentives. And with sustainable changes made to the feed-in tariff earlier this year, I think it is unlikely additional changes will be made soon.

There's also the fact that solar is one of the few things Italy can point to as a success right now. One of the reason Italy's debt was downgraded was the prospect of stagnant growth, something the solar industry can help improve.

So while a downgrade of Italy's debt isn't good news, don't you think the market has taken it a little too far this time?

Case of the falling euro
One of the bigger problems for solar manufacturers is a constantly falling euro. That is a concern for China overall, because the EU is a major trade partner with China and is one of the biggest buyers of solar panels from Chinese manufacturers.

That's one of the reasons we've heard about China possibly buying the debt of troubled EU members in recent weeks. If European countries begin to default on their debt and the euro falls, then China will be affected too. China doesn't want that to happen.

Problems in Europe overshadow solar's growth everywhere else
Investors are quick to panic over concerns about solar's demand, but they're also typically slow to realize where new demand will come from. In 2008, when Spain was a major demand market and feed-in tariffs collapsed from overinstallation, everyone panicked. But Germany and Italy picked up the slack, and 2010 was a record year for the industry.

We will likely see a similar progression, with Germany and Italy becoming slightly smaller but more consistent demand sources within the next year, based on updated feed-in tariff plans. In addition, Japan, China, India, Malaysia, Indonesia, and the U.S. are also growing demand sources. In particular, China and the U.S. have a lot of capacity to build solar plants, and with costs falling, the economics play into solar developers' hands.

Are all of these companies going bankrupt?
Yesterday a friend asked me, "How long is the solar panic of 2011 gonna last? ... These companies are priced like they're going out of business." While I don't have the answer to when the market will see value in solar stocks, I can point to fundamentals that investors increasingly should be considering. Value investors often look at price/book value as a way to gauge a stock's value. A price/book value less than 1 indicates that a stock may be a good value, while growth stocks typically trade above a ratio of 1.

Company

Market Cap

Book Value

Price/Book Value

SunPower

$981 million

$1.49 billion

0.66

Trina Solar (NYSE: TSL)

$585 million

$1.24 billion

0.47

Yingli Green Energy (NYSE: YGE)

$547 million

$1.41 billion

0.39

Suntech Power (NYSE: STP)

$572 million

$1.65 billion

0.35

JA Solar (Nasdaq: JASO)

$370 million

$1.08 billion

0.34

LDK Solar (NYSE: LDK)

$573 million

$1.36 billion

0.42

Source: Yahoo! Finance.

All of the companies listed above are priced not only as great values, but as if liquidation were their only option. And all of them except SunPower and LDK Solar have even more cash on hand than their entire market cap. The second quarter was bad, but it isn't as if most of these companies are shipping panels at a loss. Trina and Yingli had gross margins of 17% and 22.1%, respectively, and both companies were solidly profitable.

This has gone too far
I'm not sure exactly what the market is thinking but I'm not seeing the death of an industry staring us in the face. U.S. PV installations grew 69% in the second quarter, following 104% growth of installations in 2010. China has made a major commitment to solar power, and with costs falling and efficiency rising, the long-term trends favor solar.

There are risks, no doubt. JinkoSolar (NYSE: JKS) is being accused of dumping chemicals in China. But there are opportunities as well. First Solar (Nasdaq: FSLR) and SunPower provide investors with U.S. based investments and industry leading cost and efficiency respectively. If you're going to invest in solar, you might as well pick a leader.

In China, I would go with Trina Solar who has less short-term debt and a vertically integrated supply chain. That reduces many of the risks that are associated with Chinese competitors who rely on short-term loans and poly silicon or cell prices to make a profit.

This isn't a time for the faint of heart, but if you have conviction that solar is the future (like I do) now is the time to buy. Profits probably won't be robust until next year, when the demand sources I've listed above pick up, but these stocks provide a good value in the meantime. I've added positions in SunPower (B shares) and will consider adding more in coming weeks.

Fool contributor Travis Hoium owns shares of First Solar, SunPower, and LDK Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

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