If there is one theme that is taking over and garnering major interest from investors, the ESG theme has to be at the top of the list. While some investors might have called this “do-gooder” investing in the past, the ESG is for companies with strong “environmental” efforts, with “social” responsibility aspects and with strong “governance.” Not all companies with strong ESG ratings might seem as though they would fit into the screens, but exchange-traded funds (ETFs), mutual funds and individually managed accounts are raking in money almost daily that is heading into this theme.
With companies like Apple, Microsoft, Alphabet all having high weightings in the top ESG indexes and ETFs, these were all within about 5% of their consensus analyst price targets. That leaves some investors worried that the stocks either are overvalued or offer little upside versus risk, now that they have performed so well.
24/7 Wall St. ran a screen of the top 50 companies within ESG-themed ETFs and in the top underlying ESG indexes that track the companies in the S&P 500 and other major equity indexes. Our goal was to find companies that were undervalued based on Wall Street analyst expectations, and which also may have even greater upside than the pack of Wall Streeters might be looking for.
Investors need to understand that every management group tends to have its own form of ESG screening. Some managers use a relative ESG score that might allow oil companies and other so-called sin stocks because they are cleaner or better ranked than their peers. Other fund groups may screen out anything tied to fossil fuels, polluting industries and war or other sin sectors.
Of the top 50 stocks within these ESG themes, 15 stocks stood out with above-average upside. Our own base-case scenario for stocks was calling for a return of about 7% for 2020 at the start of 2020. About one-third of that upside was expected to come from dividends.
Some investors have every right to worry that a loose bastardization of the ESG theme has taken place, but that is what sets funds apart from each other. Regardless of which ESG theme you want to target, with billions of dollars flowing in, it has become impossible to ignore the ESG trend.
In the case of each ESG stock for being undervalued, we have shown the Refinitiv consensus analyst target price and offered color that would show the positive case or any concerns that may lower or skew each company’s case for fitting within an ESG investing theme. We also looked for recent analyst reports that are above or below the consensus target prices to keep some balance here.
We have used a total return expectation for an implied upside in 2020, which adds the dividends received on top of an expected gain to the consensus targets. As with all analyst research, investors should never blindly trust reports with upside target prices without doing their own research. And as any investor should expect, there is never any assurance that any analyst target will ever be reached.
The lowest implied upside threshold to be included was 8%, but many of these have expected total return expectations well over 10%. Here are 15 top stocks in the ESG universe that appear to be undervalued against the performance of the S&P 500 and Dow Jones industrials over 2020 and into 2021.
AbbVie: 11.9% Implied Upside
AbbVie Inc. (NYSE: ABBV) has seen its shares skyrocket in the past six months as if concerns about Humira never existed. Trading at $94.50, it has a consensus target price of $101.00, which gives an implied upside of 6.9%, before factoring in the 5% dividend yield. The 52-week high of $97.86 may be just over $3.00 above the current share price, but AbbVie was very briefly above $120 a share back in early 2018.
AbbVie would have even more implied upside if it weren’t for the recent pop in the stock. Mizuho’s new Buy rating from February 6 came with only a $96 target price, but the firm raised that target up to $104 several days later.
Amgen: 13.1% Implied Upside
Amgen Inc. (NASDAQ: AMGN) is the top biotech with a $131 billion market cap, and its $223.05 share price and the $246.05 target would give an implied upside of 10.3%, before factoring in a 2.8% dividend yield. Amgen just hit an all-time high of $244.99 back in December, and its shares were actually negative so far in 2020. SunTrust Robinson Humphrey is more positive than the herd with its $265 target price, and in January Citigroup took its target up to $275.