Even with all of the hype around clean energy, a wide number of solar stocks have never been able to find much affection on Wall Street, settling for single-digit price-to-earnings (P/E) multiples. Blame it on Germany. The country has been such a huge supporter of solar power that investors have perennially feared that any spending pullback would wreck the solar industry. That feared pullback in Germany is now happening, yet the industry looks set to handle the transition just fine. And that could serve as a key catalyst to expand sector multiples in 2011. [Catalyst Investing Secrets]

Based on analysis conducted by IMS Research, Germany accounts for 46% of all spending on solar power in 2010. That figure should drop to 35% in 2011 and even lower after that as Germany slowly pulls back its support for solar subsidies. Yet other countries are stepping in to pick up the slack: IMS has identified 18 markets that will each install at least 100 Megawatts (MW) of solar power in 2011, up from just eight markets in 2009. That means the solar industry “will eventually become much less dependent upon just one or two countries and less susceptible to the swings in demand caused by changes to incentive schemes,” noted the IMS analysts in a recent report.

#-ad_banner-#To be sure, Germany’s pullback means that the solar market will barely grow in 2011. Goldman Sachs believes the market will be flat in 2011, with around 17 Gigawatts (GW) of power installed. IMS Research pegs that figure at 19 GW — a +10% jump. Those figures would have been higher were it not for the recent changes in the U.S. political landscape. The U.S. government had been previously expected to make a major clean energy push in 2011, but that has now been pushed out until at least 2012.

European governments have also turned more cautious, thanks to budget problems. The fact that the market will still be at least flat while Europe and the United States hold back full support, and also while oil prices remain well below the peaks of a few years ago tells you that this is still a quite-healthy industry.

Yet it’s that geographic diversity that holds the key. Analysts are likely to stop waiting for a demand-related plunge in pricing as more countries step in to absorb demand. Indeed many solar companies have already sold out much of their 2011 production and are starting to look at orders for 2012. In the next year, we may well see a boost from rising oil prices (if the global economy picks up steam) or renewed government support in Europe and the United States.

Right now, I’m focusing on three solar plays that could make investors money.

I already discussed the reasons to be bullish about LDK Solar (NYSE: LDK). You may also want to check out the industry’s premier technology play as well as one of the industry’s cheapest stocks, First Solar (Nasdaq: FSLR) and JinkoSolar (Nasdaq: JKS), respectively.

First Solar
This company offers customers the most bang for the buck. Its technology approach yields less power, but can also be made much more cheaply. Year after year, demand has been so strong management saw the need to build yet more plants. The company boosted the number of production lines from seven in 2007 to 23 in 2009. Management decided to slow down in 2010 to wait and see how demand would fare, but now sees a much more robust market in the years ahead, with plans to operate 36 production lines in 2011 and 48 in 2012.

Yet shares have gone nowhere in the past two years, still fetching $130. That’s because investors have questioned the company’s move into partial ownership of massive solar fields in partnership with utilities. The move drained away some of the company’s nearly $1 billion in cash and is also leading to lower gross margins. But management has noted all long that total profits should rise well higher once all of its investments are complete.

First Solar’s per share profits are likely to be flat this year, but they are expected to rise +15% in 2011 and perhaps +20% in 2012 as it benefits from those capacity additions. Shares trade for less than 15 times likely 2012 profits. That’s not cheap compared to the rest of the sector. But for an industry leader that has a clear path to strong long-term growth, that’s a nice entry point.

JinkoSolar
During the summer this was shaping up to be one of the hottest IPOs of 2010. The stock raced from an $11 IPO price in May to nearly $40 as quarterly results came in far, far ahead of forecasts. That led analysts to sharply boost profit forecasts, and analysts now think JinkoSolar can earn more than $5 a share this year.

So why have shares come plunging back down to less than $25? For starters, the company announced a secondary equity offering that was initially feared to be very dilutive (and has since been completed with only 10% dilution). In addition, JinkoSolar’s six-month post-IPO lock-up period has expired, and insiders are likely taking profits with the stock still more than +100% above the IPO price. Lastly, investors have been shedding exposure to the whole group, and this high-beta stock has been especially hard-hit.

It looks to me as if all of the damage is done. For starters, investors appear to be underestimating 2011’s earnings power, just as they have been well behind the eight ball with recent impressive quarterly trends. Secondly, the company’s recent capital raise is expected to sharply boost capacity next year, which should help more than offset expected pricing declines. Lastly, the stock has finally started to rebound after falling for five out of six trading sessions. I always like to see that kind of action when analyzing a stock that has been in freefall.

Action to Take –>The solar industry has few supports at the moment, either in the analyst community or in the financial media. That’s how I like it. This sector was similarly out of favor last spring, and those with fortitude made a killing in the sector this summer.

I’m not anticipating a rapid rebound for this sector, but the three stocks I mentioned above look like solid long-term solar plays, and are currently out of favor. Now looks like a good time to get in on First Solar if you’re looking for a good long-term growth play. And even if you think JinkoSolar deserves to trade at just seven or eight times profits, you’re still looking at +40% to +60% upside. [Be sure to read my previous analysis on LDK Solar, as I think the stock could double in a year or so.]