If there is a lesson to be learned from the precipitous fall in "green" stocks last year, it's this: Combining greed with good intentions can make for a poor investment strategy.

Once among the hottest names on Wall Street, makers of solar panels, wind turbines, and other environmentally friendly gear are in for a difficult year. In 2008, almost every stock in the green space fell harder than the rest of the market during an all-around terrible year for equities. While the S&P 500 index declined by more than a third, several popular green indexes fared worse, slumping between 60 percent and 70 percent. Now, as many of those stocks languish near record lows, alternative energy appears to have stalled. Nervous investors are waiting until money begins to flow from the government's $787 billion stimulus package. Even when the spigot opens, it's not clear that a new commitment to renewable energy will be enough to revive the fortunes of an entire industry. Simply put, problems in the green space go beyond the ongoing recession and the credit crisis. An even bigger drag is overly sunny expectations for sales of wind turbines and solar panels. A bit of history: Earlier in the decade, a mix of generous subsidy plans and easy money sparked a miniboom, fueled by a flood of venture capital and a seemingly unquenchable demand for shares of a small number of publicly traded companies. Between 2004 and 2007, private-sector investments in solar jumped almost 20-fold. As money poured in, output soared—just as demand was about to be hit by a devastating one-two punch. First, subsidy rollbacks in key markets like Spain hurt. And then the credit crisis froze financing for new projects. Suppliers suddenly found themselves with too many solar panels. Proposed wind farms went begging for start-up funding.

Soon, Wall Street darlings like SunPower and SunTech were announcing job cuts. OptiSolar, a thin-film solar panel maker, slashed 300 jobs, or half of its staff, in January. VeraSun, an ethanol maker, filed for bankruptcy and is selling off several plants in the Midwest. Even wind's most visible backer, Texan oil billionaire T. Boone Pickens, has scaled back his plans to develop "America's wind corridor." At the same time, with oil prices dipping below $40 a barrel (more than $100 cheaper than last year's peak), the economics of all sorts of clean energy are far less attractive.

The industry's fortunes are likely to get worse before they get better, with 2009 shaping up as a "shakeout year." Ted Sullivan, an analyst at Lux Research, sees a stark demarcation, particularly among large, publicly traded solar companies facing a near collapse in demand. "You could have every solar company fail but the top 15 and still have a little too much supply," he says. The market, he says, is already picking winners. Valuations remain relatively high for just a few companies. Industry leaders First Solar, SunPower, and Energy Conversion Devices have so far managed to hold some of their value. But Wall Street is beginning to count some of the other players out. Many analysts expect less-well-capitalized firms without substantial technological advantages to fall by the wayside over the next few years.

"Ambitious goal." The brightest hope for an overall recovery in green energy remains an environmentally friendly president. The Obama administration's pledge to double clean-energy production over three years would have been scoffed at as conservative just a year ago, says Ethan Zindler, head of North American Research for New Energy Finance. "Now that's a pretty ambitious goal," he says. The massive stimulus could help, but the billions of dollars targeted for clean energy cannot offset all the losses. Analysts at Merrill Lynch say fleeing investment already renders last year's passage of a key solar-related tax credit "impotent."

The stimulus bill is designed in part to let project developers apply for grants directly from the federal government. That could prove a lifeline for replacing a vital source of funding destroyed by the credit crisis. Before the crunch, investors, often big banks, helped fund large chunks of solar or wind projects by purchasing tax credits from developers to offset their own tax bill. As profits disappeared, so have most of those so-called tax equity investors.

Already, the industry is feeling the difference. Mark Morelli, president and CEO of Energy Conversion Devices, says, "Last year, everything was getting financed. Every project you could put on the market was snapped up immediately. Clearly, things are much more selective." For now, government help may very well allow the green energy industry to survive. For it to thrive, however, both financing and demand will have to recover.