The stock market is an ever-evolving giant that over the years has taken on many new life forms. Investors in the 1980s had no idea what a dot-com boom was going to be. Similarly, those investing in the 1990s and early 2000s had little idea of cloud computing or the Internet of Things. Now, already two decades into the new century, one of the biggest new areas for investors are stocks that are in the so-called ESG basket. While this is not a new technology or health care breakthrough, conscientious investors will look for companies that have the traits that better represent their personal aspirations.
Environmental, social and governance, or ESG, refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
The analysts at Goldman Sachs noted this when discussing the large investor interest in the category:
The dichotomy of ongoing inflows into global ESG funds (+$135 billion year-to-date according to Morningstar) vs. non-ESG funds (-$422 billion) remains stark. Net inflows have been similarly strong across Integration, Exclusion & Thematic strategies as well as ESG-linked ETFs, each with trailing 12 month growth in excess of 100%. ETFs have made up a larger share of ESG net inflows in 2020 year -to-date (30% vs. 28% in 2019), though actively-managed ESG inflows have re-accelerated in recent quarters.
They noted this when discussing overlooked companies with big potential:
Understanding that the market primarily consumes ESG data with clear biases toward product impact and high disclosure, we screen our SUSTAIN ESG scoring framework for names that rank well across a variety of factors and are under owned in our ESG fund universe.
The analysts found four companies that score well in the firm’s ESG grading framework but are underowned by ESG fund managers, and all are rated Buy. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Caterpillar
This large-cap leader was hit by trade worries in 2019 but has rallied nicely this year off the March lows. Caterpillar Inc. (NYSE: CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It is also one of the most valuable brands in the world.
The company principally operates through three primary segments (Construction Industries, Resource Industries and Energy & Transportation). It also provides financing and related services through its Financial Products segment.
The company posted better than expected third-quarter results Tuesday morning, though sales did decline year over year, and the profit margin was down as well.
Shareholders receive a solid 2.52% dividend. The Goldman Sachs price target for the shares is $162, and the Wall Street consensus target is $150.18. Caterpillar stock closed Monday’s trading above both levels at $163.20.
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