Environmental, social, and governance (ESG) exchange traded funds often feature hefty exposure to growth stocks, and with those names struggling this year amid rising interest rates, critics aren’t being shy about levying pointed words at ESG ETFs.
However, that criticism doesn’t account for some vital factors, including the points that many investors view ESG as a long-term proposition and that plenty of previously pricey growth stocks are now undervalued. That could prove to be good news for ETFs such as the ClearBridge Large Cap Growth ESG ETF (LRGE).
LRGE focuses on large-cap stocks with attractive ESG credentials. What may be attractive about the fund today is that some of its holdings are undervalued and some of those names have quality, wide moat attributes. In fact, some analysts argue that growth is the place to find deals today.
“According to our valuations, the growth category is now the most undervalued, trading at a 19% discount to our fair value, followed by the value category at an 8% discount and then core at a 6% discount. Across capitalization levels, we continue to see the best opportunities among small-cap stocks (19% discount), followed by large-cap (13% discount) and mid-cap (11% discount) stocks,” noted Morningstar analyst Dave Sekera.
Among the newly minted undervalued stocks with durable competitive advantages is e-commerce giant Amazon (NASDAQ:AMZN). That’s a relevant point for LRGE investors because that stock is the ETF’s largest component at a weight of 8.43% — an advantage of 112 basis points over the fund’s second-largest holding.
“Companies rated with wide economic moats are those with long-term durable competitive advantages that will allow them to generate excess returns over their cost of capital. These companies are best positioned to weather any potential economic disruptions and typically have the strongest pricing power,” added Sekera.
Another example of a high-quality growth stock that’s more attractively valued today than it has been in some time is Salesforce (NYSE:CRM). That name accounts for 2.66% of the LRGE roster.
“Salesforce hasn’t been immune to the drubbing the technology sector has experienced this year. While the enterprise cloud computing solution provider likely faces a dip in revenue growth below 20% at some point in the next few years, we think ongoing margin expansion will provide compound earnings growth of more than 20% for much longer,” said Morningstar’s Susan Dziubinski.
Other LRGE holdings that qualify as undervalued by Morningstar’s analysis include Meta Platforms (NASDAQ:FB) and Netflix (NASDAQ:NFLX). Those two stocks combine for 5.3% of LRGE’s roster.
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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.