Back in April, Morningstar’s Christine Benz put together three mutual fund portfolios catering to investors focused on ESG (environmental, social and governance) investing. Each of the funds has stocks to buy for the long haul.
For the sake of our stock-focused audience, I’ll use Morningstar’s Aggressive ESG Mutual Fund Retirement Saver Portfolio to select my 10 ESG stocks to buy. The portfolio consists of seven funds, but I will only be including the actively managed ones in this exercise.
However, before you commit your hard-earned capital to some of these stocks, consider that not everyone feels ESG investing is “all that and a bag of chips.” For example, Tariq Fancy — who was once Blackrock’s (NYSE:BLK) Chief Investment Officer for Sustainable Investing — believes that many financial institutions like ESG-related products because they generate higher fees than plain vanilla ones. Fancy noted the following:
“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise.”
Of course, you can argue both sides of this discussion until the cows come home. The right answer is years away. But in the meantime, for folks who buy into ESG investing lock, here are 10 ESG stocks to buy.
- Microsoft (NASDAQ:MSFT)
- Danaher (NYSE:DHR)
- Comcast (NASDAQ:CMCSA)
- Amazon (NASDAQ:AMZN)
- Visa (NYSE:V)
- American Tower (NYSE:AMT)
- Republic Services (NYSE:RSG)
- Hologic (NASDAQ:HOLX)
- Manhattan Associates (NASDAQ:MANH)
- Flowers Foods (NYSE:FLO)
ESG Stocks to Buy: Microsoft (MSFT)
Unlike many other gallery articles that I write on stocks to buy, the selection process for this piece was actually very straightforward. I picked the top holdings from four of the seven funds in Morningstar’s article.
The first of three stocks from the Parnassus Core Equity Fund (NASDAQ:PRBLX) is Microsoft, the fund’s top holding. And, while I’ve left the actual stocks to the managers of the four funds, I have managed to create some diversity with my list of 10 stocks to buy. MSFT stock is the first of two tech stocks on this list.
This particular fund is designed to produce capital appreciation in both good times and bad. It does that by investing in quality companies with strong management and long-term competitive advantages.
Microsoft definitely fits that profile — just think of Azure, Xbox, Office 365, Microsoft Teams, LinkedIn and the company’s other ubiquitous products and services. Microsoft is set up for the long term. Oh — and it doesn’t hurt that it has $56 billion in trailing 12-month (TTM) free cash flow (FCF) either.
The second of three picks from PRBLX is Danaher, a healthcare and life sciences company that started as a real estate investment trust (REIT) in the late 1960s.
Danaher is PRBLX’s third-largest holding. I didn’t go with the second-place stock — Alphabet (NASDAQ:GOOGL) — because I didn’t want two stocks from one sector and one fund.
Also, with all of these selections, it’s important to remember that the holdings aren’t real-time. In this case, the holdings are from Jul. 31, so there’s about a month lag in data. In the case of PRBLX, however, the fund turns its entire portfolio approximately every 32 months (37.2% annual turnover). That means its top 10 holdings probably won’t have changed too much in the past month.
Between Larry Culp serving as CEO from 2001 to 2014 (Culp is now the head of General Electric (NYSE:GE)) and Tom Joyce to now Rainer Blair, this company has had an incredibly strong C-suite. What’s more, in the past 15 years, DHR stock has generated an annualized total return of 17% — 600 basis points higher than the entire U.S. market.
ESG Stocks to Buy: Comcast (CMCSA)
My third and final pick of the stocks to buy from the Parnassus Core Equity Fund is Comcast — the cable company turned media empire. Unlike AT&T (NYSE:T) and Verizon (NYSE:VZ), Comcast has figured out how to compete in the communication services sector on not one but two fronts. That’s exceptionally rare.
Interestingly, Comcast also recently announced that it was partnering with ViacomCBS (NASDAQ:VIAC) to launch a subscription video-on-demand (SVOD) service sometime in 2022. The streaming service will be called SkyShowtime. It’s expected to go live in up to 20 European countries.
Rather than both companies duking it out for a streaming audience, these big names decided to deliver to Europeans what ought to be an extremely attractive subscription. The partnership will be a 50-50 joint venture and “will run on NBCUniversal’s platform” with the Sky name (which is better known in Europe than Comcast’s Peacock branding).
This partnership in mind, one can only wonder if a successful launch in Europe will lead to a streaming-service merger in the U.S., where both Comcast and ViacomCBS have fewer subscribers than the top three leaders. If that were to happen, it should mean great things for CMCSA stock.
Speaking of streaming, this next pick of the stocks to buy is an e-commerce and cloud giant that’s also a bigger streamer than either Comcast or ViacomCBS. Perhaps that’s one of the reasons the portfolio managers who run the Brown Advisory Sustainable Growth Fund (NASDAQ:BIAWX) picked Seattle’s best.
Amazon is the fund’s second-largest holding with a weighting of 4.4%, 40 basis points behind Microsoft. Its top 10 holdings account for 41% of the fund’s total net assets. Brown Advisory as a company also tends to invest in focused portfolios that own exceptional businesses.
I might not like some of Amazon’s employment practices. Still, there’s no question the work it’s doing with electric vehicles (EVs) and other climate-related initiatives are part of the reason it makes most ESG portfolios.
It also doesn’t hurt that AMZN stock has generated a 15-year annualized total return of 37.5%. That’s more than three times the U.S. market as a whole.
Jeff Bezos might not be Amazon CEO any longer, but this is still his company. Bezos is one smart dude.
ESG Stocks to Buy: Visa (V)
So far, out of the four stocks to buy I’ve selected, I’ve covered four different sectors: technology, healthcare, communication services and consumer cyclical. Now financial services makes it five sectors.
Visa recently made news by paying approximately $150,000 for its first non-fungible token (NFT). Clearly, this payment processor takes the blockchain, cryptocurrencies and decentralized finance (DeFi) very seriously.
“Call it what you will, the world’s largest payment provider has just given a full endorsement of the Ethereum blockchain and has cast a huge vote of confidence in the network’s abilities,” said financial analyst Mati Greenspan, according to CryptoNews.
But whether or not Visa takes crypto seriously is beside the point. More importantly, this company operates at the forefront of financial services. So, there’s no chance it would ignore the digitalization of finance in the first place.
The purchase of an NFT might seem like a publicity stunt, but it’s also a reminder to all the DeFi fans out there that Visa’s in the game and ready to play. Anyone who doubts this company’s ability to claim a large piece of the crypto pie undervalues the amount of power it holds.
Back in February, I recommended V stock and said investors were overlooking it. While it’s tough to overlook a $500 billion market capitalization, it can happen from time to time. That said, whatever happens in the cryptocurrency space, I’m now sure Visa will be a player.
American Tower (AMT)
My third and final pick of the stocks to buy from the Brown Advisory Sustainable Growth Fund, American Tower, is a REIT dressed up as a global owner of cell towers. Basically, without AMT and other players, cell service would not be nearly as effective.
American Tower is the ninth-largest holding of BIAWX, with a weighting of 3.8%. So, I went all the way down to the ninth spot of the fund’s top holdings to get another different sector to play. Otherwise, I might have been tempted to pick something higher up in the fund’s weightings, such as Intuit (NASDAQ:INTU).
That aside, though, this company reported strong second-quarter results on Jul. 29. It beat the analyst estimate for funds from operations (FFO) by eight cents at $2.42 a share. On the top line, AMT also delivered revenue of $2.3 billion, roughly 5% higher than the consensus.
AMT stock has a total return of about 27% year-to-date (YTD). That’s considerably higher than its peers and the U.S. market. Out of the 23 analysts covering American Tower, 17 rate it either a “buy” or “overweight.” The current median target price is $307.50.
ESG Stocks to Buy: Republic Services (RSG)
Next up on this list of stocks to buy are mid-cap picks courtesy of the Parnassus Mid Cap Fund (NASDAQ:PARMX). This fund is a collection of 44 holdings — about 5% of the holdings of the Russell Midcap Index, its benchmark.
The first of two picks from PARMX, Republic Services has a 4.4% weighting and is the fund’s largest holding. So, obviously the portfolio managers believe in the growth prospects of America’s second-largest waste management company.
Parnassus isn’t the only one that likes the company, though. On Aug. 24, Goldman Sachs analyst Jerry Revich upgraded RSG stock to a “conviction buy.” However, other analysts aren’t as sure about it. Out of 17 analysts covering it, some 10 have the stock at a “buy” or “overweight” rating.
No matter. Republic Services currently generates TTM FCF of $1.47 billion. Based on a market cap of $39 billion, it has an FCF yield of 3.8%. While that puts it below the 4% to 8% yield I usually like to see for growth at a reasonable price, its FCF margin is still nearly 14%. I consider anything over 10% to be attractive.
The second of PARMX’s two selections for this list of stocks to buy is Hologic, a company that I must admit I know little about. Still, HOLX stock is the fund’s second-largest holding at 3.8%.
With some research, it turns out that Hologic focuses on women’s health and well-being through early detection. It generates 44% of its sales from its breast health screening and diagnostics products. Another 39% of the company’s sales are from other diagnostic products, while the remainder comes from surgical and skeletal health product sales.
I must say that, just looking very briefly at Hologic’s website, I genuinely want to learn more about the company. Growing fast, it has made six acquisitions over the past 15 months, valued at more than $1.3 billion (Page 11). Hologic also generates a boatload of free cash flow. Its TTM FCF is $2.3 billion for a 37.6% FCF margin and 10.6% FCF yield.
If you’re not at least a little intrigued by this fast grower, you aren’t looking close enough.
ESG Stocks to Buy: Manhattan Associates (MANH)
Next up on this list of the stocks to buy is MANH stock. When the supply chain is severely broken, the products and services provided by companies like Manhattan Associates are in great demand. Its software platform — which connects a company’s front-end sales and back-end supply chain — is critical to the success of retailers, wholesalers, manufacturers and logistics providers worldwide.
Manhattan reported its Q2 2021 results on Jul. 27. Highlights for the quarter included a 22% increase in sales, a nearly 53% jump in adjusted earnings per share (EPS) and a repurchase of $32.9 million of its stock during the quarter. What’s more, all five of MANH’s revenue streams increased over Q2 2020.
For the entirety 2021, this company now expects around $646 million in revenue and around $2.03 in adjusted EPS at the midpoint of its guidance. Moreover, its TTM FCF is $163.7 million. That gives it an FCF margin of 26.4% and an FCF yield of about 1.6%.
From a valuation perspective, MANH stock is more expensive than it has been in years. However, the portfolio managers of the Boston Trust Walden Small Cap Fund (NASDAQ:BOSOX) feel the stock still has legs. As of Jun. 30, MANH was its top holding with a weighting of 2.3%.
Flowers Foods (FLO)
Last up on this list is another small-cap pick from BOSOX: Flower Foods. This company has a 1.9% weighting in the fund and represents the consumer defensive sector, the eighth sector mentioned in this article.
It has been a while since I’ve written about Flowers Foods.
I last discussed FLO stock back in May 2018, including the baker of breads and other products in a list of recession-resistant stocks to buy. Unfortunately, since then its performance can best be described as mediocre, up about 20%. Compared to Church & Dwight (NYSE:CHD) (another name in that article, up 75%), Flower Foods has been a disappointment.
However, perhaps that’s why BOSOX has it as one of its top 10 holdings. Although the company’s Q2 results look anything but growth-oriented, the reality is this business is in better shape today than before the pandemic.
Of all the stocks on my list, FLO stock is the one I’m most uncertain about. Management seems upbeat about the future, but who’s to say whether they’re “faking it until they make it” or genuinely confident. I guess we’ll see soon enough.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.