– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

Cleantech, with its intoxicating mix of high-tech promise and save-the-world bloody-mindedness, has fallen harder and faster in the destruction that has visited growth stocks in 2008.

Underscoring the sector’s risks, German solar cell maker Q-Cells cut its 2009 outlook on Tuesday, saying slack demand could linger until the middle of next year amid a growing industry price war. The stock lost nearly a fifth of its value in trading and the news sent down shares of rival companies.

But while it’s too early to say when the selling might be over for solar and wind stocks, gems lie in the rubble of collapsed valuations, ready for investors to snap them up when markets recover their appetite for growth and its attendant volatility.

To understand what is possible, take measure of the decline: The WilderHill Clean Energy Index, composed of around 50 renewable energy and conservation stocks, has lost three quarters of its value year-to-date, twice the loss of the S&P 500.

The mea culpas are flowing. “Every stock we cover has performed worse than the S&P 500 year-to-date,” Raymond James analyst Pavel Molchanov confessed recently in a note to clients.

In recent weeks, solar stocks, the global sector’s biggest segment by far in terms of market capitalization, have cracked up — laid low by the sharp fall in the price of oil, the plunge in the euro, the credit crunch and a move to safer havens.

The solar sector is made up of players across the Americas, Europe and China and many stocks are trading at below or close to their book value on the assumption some companies will go out of business.

Deliveries of wind systems have slowed for all major turbine makers, ranging from big diversified companies such as General Electric and Siemens AG, to wind specialists such as Vestas from Denmark or Gamesa of Spain.

Bears say the solar sector faces a future of declining prices and uncontrolled capacity expansion, especially in China.

Spot prices for the polysilicon used in most solar cells have collapsed to below $200 per kilogram from upward of $500 earlier in this year.

PICKING THROUGH THE RUBBLE

But stock pickers say the impact of plunging solar product prices is not being shared equally.

Low-cost technology leaders with strong balance sheets are seeing minor price declines while lesser names, especially from China, are finding it hard to sell their products at any price.

For now, almost everyone’s favorite pick remains First Solar, which has everything going for it except perhaps valuation, they say. The company is often compared to Intel Corp, on which it has modeled its manufacturing strategy for making solar cells.

First Solar produces solar cells used to form photovoltaic panels at a cost approaching $1.00 per watt compared to the $2.50/watt industry average, analysts say. Gross margins remain intact around 50 percent while other players face compression.

“If you want to play one stock in the U.S., Europe or China, it has to be First Solar,” says Mark Bachman of Pacific Crest Securities in Portland, Oregon.

Valuation has long been First Solar’s thorn. But the stock, which traded above $300 earlier this year and at a valuation as high as 140 times forward forecasts, has seen its valuation sink to 17.5 times next year’s consensus profit forecast.

Put off by its valuation previously, Edward Guinness at Guinness-Atkinson Alternative Energy Fund, became a buyer in mid-October once the stock was cut in half.

His alternative energy fund, which has some 40 pure play cleantech investments, has lost two-thirds of its value from a peak of $150 million earlier in the year but Guinness still sees promise relative to other energy funds in his group.

Cowen & Co analyst Robert Stone says Energy Conversion Devices Corp has managed to build backlog while taking advantage of falling cell prices. He sees Energy Conversion shares gaining up to 60 percent.

The company’s secret to withstanding recessionary pressures is the 50 percent of its backlog is from large, well-capitalized customers like Marcegaglia of Italy, which build Energy Conversion’s panels into their own residential roofing products.

Guinness says he is looking to companies that have the scope to become integrated, global players. Pure cell or solar panel plays can only grow so big because roughly 60 percent of industry revenue is in the installation end of the business.

U.S.-listed SunPower has made strides to expand from components downstream into the residential installation market, Guinness says, and Germany’s Q-Cells is in the early stages of such a move and shows promise once its business stabilizes.

Cowen’s Stone sees prospects for SunPower to see a 70 percent gain relative to the market over the next 12 months if the funding crises eases and already approved U.S. utility deals move ahead.

But analysts say that pricing declines must play out before investors are willing to get aggressive about solar stocks again.

American Technology Research analyst John Hardy says solar is likely to be one of the early beneficiaries of a potential loosening up of credit markets in the new year. Once pricing stabilizes in the solar market, survivors could see rapid gains.

“Stocks are at levels where any positive catalyst will move solar much higher in a hurry,” Hardy says.

–  At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by Eric Auchard, click here.

(Pictured above: Solar panels fill the roof of mausoleums at the cemetery in Santa Caloma de Gramenet, near Barcelona, December 2, 2008. REUTERS/Gustau Nacarino)