Owing to the fact that many stocks with favorable environmental, social, and governance (ESG) traits are also growth equities, many ESG names and the related funds are struggling this year.
Blame that on rising interest rates, among other factors. Investors are right to focus on year-to-date performance, but it’s not all doom and gloom, because those declines are opening the door to valuation opportunities. Translation: Some stocks with impressive sustainability credentials are less expensive today than they were at the start of 2022.
Investors who don’t want to stock-pick among this group may want to consider exchange traded funds, including the Invesco ESG S&P 500 Equal Weight ETF (RSPE).
“Strategies focused on sustainable investing have languished this year, following the decline in technology stocks while largely missing out on the energy rally. However, there is some good news: Companies with leading sustainability practices such as Adobe (ADBE), Salesforce (CRM), and Aptiv (APTV) are now trading well below their fair value estimates,” said Morningstar analyst Lauren Solberg.
As its name implies, RSPE is an equal-weight ETF. It’s the ESG relative of the famed Invesco S&P 500 Equal Weight ETF (RSP). With that in mind, none of RSPE’s 182 holdings exceed a weight of 0.79%, as of April 2022. However, Adobe, Aptive, and Dow component Salesforce are all members of the ETF’s roster. That trio is badly bruised and now attractively valued.
“Among the hardest-hit stocks this year have been Salesforce, Adobe, and Aptiv, which tumbled 26.4%, 25.0%, and 35.9%, respectively. All three are now undervalued according to Morningstar's analyst-assessed fair value estimates,” added Solberg.
Several member of the communication services sector have strong sustainability credentials, and some are now inexpensive after 2022 declines. That group includes AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), and Dow component Walt Disney (NYSE:DIS) -- all of which are members of the RSPE portfolio.
“We don't believe AT&T enjoyed material synergies between its telecom and media operations, and we were happy to see these assets split into entities that will have greater strategic flexibility and focus. We award AT&T a narrow moat based primarily on cost advantages within the wireless business. Elements of efficient scale also benefit both the wireless and fixed-line businesses,” said Morningstar analyst Michael Hodel.
Other members of the RSPE portfolio that are now attractively valued with favorable ESG traits include Air Products and Chemicals (NYSE:APD), Booking Holdings (NASDAQ:BKNG), and Microsoft (NASDAQ:MSFT).
“For Microsoft overall we assign a wide moat rating arising from switching costs, network effects, and cost advantages. We believe that Microsoft's different segments and products benefit from different moat sources,” added Morningstar’s Dan Romanoff.
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