Following a surge of interest in environmental, social, governance (ESG) investing, many investors have begun seeking out undervalued ESG stocks. Indeed, many prefer to prioritize investments that fall in line with their values.
Simultaneously, concerns about global warming, coupled with the rise of affordable and sustainable energy sources, have motivated many companies to reevaluate their energy-consumption practices. And a growing emphasis on diversity, equality and inclusion (DEI) within workplaces, along with a commitment toward transparency in operations and risk management, has begun to influence many companies’ corporate behavior.
While some firms have successfully integrated ESG principles into their business models to support profitability and growth, others have faced challenges balancing returns with more ethical and moral practices. Nonetheless, the momentum behind ESG investing has continued to build.
Investing in companies committed to ESG principles could offer potential opportunities for investors seeking both financial returns and a positive impact on the world. Below are three undervalued ESG-focused companies that are compelling choices to add to any investment portfolio.
NextEra Energy (NEE)
Just by seeing its name, it might be intuitive that this company is looking to bring the “next era” to energy consumption. With an MSCI rating of AA, NextEra Energy (NYSE:NEE) is a world leader in green energy. Yahoo Finance analysts estimate that this stock will trade within a one-year price range of $76-$108, with an average of $89.43.
NextEra has two principal businesses, Florida Power & Light (FPL) and NextEra Energy Resources (NEER). NEER is the world’s largest generator of wind and solar energy, while FPL is one of the largest electric utility and infrastructure companies in the nation.
As solar energy has reached low costs of around $30-$50 per MWh, it has gained popularity compared to grid electricity, which costs around $150-$160 per MWh. With the global renewable energy market expected to grow at a compound annual growth rate (CAGR) of 16.9% from 2023 to 2030, companies such as NextEra will have no issue maintaining growth.
Taking a look at NextEra’s most recent earnings report, the company grew earnings per share (EPS) 8.6%. While its EPS growth is nothing spectacular from a large-cap company, its net income doubled in the past year. This quarter, net income came in at $2.8 billion, or $1.38 per share. That’s up from $1.38 billion, or 70 cents per share a year ago.
In the coming year, we are looking for NextEra to deliver on its expected fiscal year 2023 EPS of $2.98-$3.13. However, NextEra’s main appeal comes from its strong dividend history. In 2021, it became a Dividend Aristocrat when it hit its 25th consecutive annual dividend hike. It currently yields 2.7%, and its plans to grow 10% annually until 2024 should keep investors confident.
Given that the company has slumped nearly 25% off its all-time highs due to the recent bear market, its valuation is sitting at an attractive price-to-earnings (P/E) ratio of 22.03x (compared to the mean of 26.05x and high of 33.88x).
With expectations for continued demand in Florida, plans to break into the green hydrogen economy, and efforts to simplify its natural gas business, NextEra presents an exciting investment thesis that all ESG-conscious inventors should look forward to.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is the largest semiconductor manufacturer and also boasts an impressive MSCI ESG score of AAA. It is widely respected as a leading provider of silicon fabrication services. Currently, it has a market cap of $472 billion. Yahoo Finance analysts project a one-year range of $85-$135, with an average price of $91.04.
The semiconductor industry is valued at around $570 billion and is projected to grow at a CAGR of 12.2% until 2029. This growth is largely attributed to the surge of artificial intelligence (AI) and rising demand for homeowner electronics.
In terms of ESG, TSM’s initiatives begin with its sourcing of materials from “conflict-free” smelters, certified by the Responsible Minerals Assurance process. It is also a strong proponent of green manufacturing. In fact, it boasts a 96% waste recycling rate and a 98.9% reduction rate of volatile organic gases. It even has its overseas sites achieving net-zero emissions in scopes 1 and 2.
Taking a look at its valuation metrics, we see that TSM trades at a P/E ratio of 16.08, a relatively discounted ratio compared to the sector’s median of 25.21. When examining its trailing-12-month EV/EBITDA of 8.77, we see that it sitting at an amazing discount of around 41% compared to its peers.
The company’s earnings were affected by the overall global economic conditions and decline in demand. However, we have no doubt that TSM will maintain its position as an ESG leader. And we expect it to thrive in the upcoming AI revolution.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) is a multinational technology company headquartered in San Jose, California. It specializes in networking hardware, software and telecommunications equipment. Founded in 1984, the company has become a global leader in the development of networking solutions.
But what does it do? Cisco’s products and services transform the way people connect and communicate. As such, the company serves a wide range of industries from healthcare to education.
With an MSCI rating of AA, Cisco is one of the leaders when it comes to ESG. For one, the company is aligned with the Paris Agreement’s goal of keeping the global mean temperature from rising more than 1.5 degrees Celsius.
Additionally, Cisco has recently unveiled its vision for the Cisco Networking Cloud, an integrated management platform designed to simplify IT operations. This platform aims to offer a unified experience for both on-premise and cloud-based operating models. The initiative is part of Cisco’s broader mission to simplify networking and securely connect the world.
Let’s examine some valuation metrics. Cisco’s TTM P/E trades at around 18.46, which is well below the sector median of 25.21. Therefore, Cisco is trading at around a 26% discount to its peers. Even examining its EV/EBITDA of 12.3, this still puts it at around a 20% discount to its peers. Furthermore, EPS is expected to grow steadily over the next few years at an average of 5%. Therefore, an investment in Cisco is an attractive addition to a strong ESG portfolio.
On the date of publication, Ian Hartana and Vayun Chugh did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
