Clean energy, with its various forms, has been a hot investing area lately due to the global push for going green. In the United States, President Biden is voicing for clean energy transition with an optimistic goal. China’s president Xi recently reiterated his vows to turn his country carbon neutral by 2060. China will start tapering coal usage from 2026. Europe’s efforts to become a green continent is also pretty prevalent.

Still, Invesco Solar ETF (TAN Quick QuoteTAN - Free Report) dropped about 6% on May 4. Let’s find out why such a steep correction took place.

Inside the Crash in Solar Stocks

Solar stocks declined on May 4 as investors doubt companies’ ability to cash in on the record demand due to supply chain issues, per a CNBC article. SolarEdge (SEDG Quick QuoteSEDG - Free Report) shares slumped about 16% on May 4 and triggered the turmoil as the company said rising freight costs will weigh on its margins. Freight costs have been uphill in the past few months.

“Ocean freight prices have increased by more than 100% over the last months and our pre-negotiated prices have gradually expired and exposed us to higher freight costs worldwide,” Zvi Lando, the company’s chief executive officer, said on the earnings call, as quoted on CNBC. This is the reason why Breakwave Dry Bulk Shipping ETF (BDRY Quick QuoteBDRY - Free Report) has gained about 165.4% in the past three months.

SolarEdge Technologies came up with quarterly earnings of 98 cents per share, missing the Zacks Consensus Estimate of $1.01 per share as well as the year-ago earnings of $1.03 per share. However, the company beat revenues by 2.38%. SolarEdge takes the top spot in the solar ETF TAN with about 9.85% weight and played an important role in hitting TAN hard on Tuesday. SolarEdge’s issues acted as a cornerstone for the entire industry.

There has been an acute chip shortage globally. Chips are important components for both battery storage and solar inverters. Enphase Energy (ENPH Quick QuoteENPH - Free Report) , last week said its second-quarter shipments would be pressured by the global chip crunch.

If this was not enough, U.S. Treasury secretary Janet Yellen cautioned on May 4 that interest rates may need to rise over time to keep the U.S. economy from overheating, intensifying a sell-off in growth stocks. However, Yellen elucidated her remarks later on, saying that higher rates are not what she is “predicting or recommending” as quoted on Financial Times.

What Lies Ahead?

With many analysts believing that the supply crunch in semiconductors will be prolonged, we expect some more margin pressure in the cards for the solar stocks. We could see further selloffs in the space ahead.

But once the correction is done in the space, one can take advantage of the buy-the-dip strategy. The fundamentals are strong for the space. The cost of renewable energy generation has been falling in recent years with continued technological innovation. Increasing global acceptance has also been favoring the space.

Biden has expansionary plans for clean energy. He is forming a plan — a Clean Energy Revolution — to address the issue of climate emergency. He sees America as becoming a 100% clean energy economy by 2035 and having net zero emission by 2050.

With such lofty projections for the long term, it is wise to hold such stocks with a long-term view.Apart from TAN itself, SPDR S&P Kensho Clean Power ETF (CNRG Quick QuoteCNRG - Free Report) , First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN Quick QuoteQCLN - Free Report) and ALPS Clean Energy ETF (ACES Quick QuoteACES - Free Report) are some of the holdings that can be bought on the dip (read: Solar Installation Hits a Record in 2020: ETF to Tap the Boom).

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