With many stocks with strong environmental, social, and governance (ESG) credentials also being growth equities, finding bargains in this space can be tricky.
The same goes for wide moat equities because many companies with that designation also have quality attributes, and quality rarely comes cheap. However, one benefit of this year’s broad market slump is that plenty of growth stocks, including some with ESG traits, are now on sale.
Rather than stock-picking among that group, investors can turn to exchange traded funds. In this case, the VanEck Morningstar ESG Moat ETF (CBOE:MOTE) is a compelling choice. MOTE debuted last October and tracks the Morningstar® US Sustainability Moat Focus Index. Good news: That index is full of stocks on sale.
“Big share price declines are creating opportunities for long-term investors to scoop up high-quality stocks at low prices. That list of undervalued names includes Comcast (CMCSA), Amazon.com (AMZN), Adobe (ADBE), and BlackRock (BLK),” wrote Morningstar analyst Lauren Solberg. “These are companies that earn wide Morningstar Economic Moat Ratings, meaning they have strong competitive advantages that should help them outperform their peers over the next 20-plus years. Less than one fourth of all stocks covered by Morningstar are considered wide moat.”
In order of appearance on the MOTE roster, Comcast, BlackRock, and Adobe combine for 6.27% of the ETF’s roster. Amazon isn’t part of the ETF’s roster. None of its 57 holdings command an allocation in excess of 3.39%. Adding to the allure of MOTE is that the three stocks it holds of the quartet of stocks mentioned by Morningstar aren’t the only names in the fund trading at attractive valuations.
“On the bright side, companies with Morningstar Ratings of 5 stars—stocks trading at the steepest discount to their analyst-assessed fair market value—that also carry wide moat ratings are popping up in droves,” added Solberg. “Seventeen companies in the wide-moat index are currently trading at 5-star prices: That’s 12% of the index. On average, just 1% of the companies in the index were ever rated as a 5-star stock in the last five years.”
Other MOTE components that appear on the Morningstar list of newly undervalued wide moat companies include ServiceNow (NOW), T. Rowe Price (NASDAQ:TROW), Veeva Systems (NASDAQ:VEEV), and Tyler Technologies (NYSE:TYL). That quartet combines for almost 6% of MOTE’s roster.
“We assign a wide moat rating to Veeva, stemming from switching costs and to a lesser extent intangible assets,” said Morningstar analyst Dylan Finley. “The company provides mission-critical software for the life sciences industry. The high degree of specification behind Veeva’s software is an asset to its clients (in improving workflow and ease of adherence to regulations) and Veeva itself (clients have their complex workflow entrenched in its software).”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
