In the world of ESG stocks, it is often believed that implementing ESG surrenders profitability. However, such a narrative is false.
ESG investing can be narrowed down to three sub-categories: impact investing, positive screening and negative screening. Indeed, impact investing often ignores a firm’s financial prospects. However, positive and negative screening methods are contra concepts that, in reality, prioritize profitability. For example, positive screening actively seeks companies with efficient waste management programs to ensure nimble use of resources—conversely, negative screening phases out firms with dodgy accounting standards.
The examples above are merely pieces of the puzzle; the bottom line is that ESG can be profitable, so I drafted three profitable ESG stocks for you to consider. Let’s discuss each in detail.
UnitedHealth (UNH)
UnitedHealth (NYSE:UNH) earns a low-risk ESG rating from Sustainalytics, with high-quality management being salient to the data vendor’s conclusion. Moreover, UnitedHealth isn’t short of fundamental tailwinds, as the company’s substantial market share of 31.39% is supported by a historical 10-year compound annual growth rate of 11.60%.
Morgan Stanley recently issued its new-year outlook and labeled the healthcare sector as a potential winner. More crucially, UNH stock is Morgan Stanley’s top pick in the managed healthcare industry, with the bank citing UnitedHealth’s growth prospects and business model central to its conclusion. I concur with Morgan Stanley’s outlook. UnitedHealth has significant prospects stemming from Optum via telehealth offerings. Additionally, UnitedHealth’s core business adds baseline growth through sustainable income from insurance premiums.
UnitedHealth’s return on common equity ratio of 25.30% speaks volumes. The metric suggests sustainable profitability paired with abundant shareholder value. As such, it is no surprise that UNH stock has outperformed the S&P 500 in the past decade. We could see additional alpha from UNH stock in its next business cycle, given its modest price-to-earnings ratio of 23.42x and its respectable dividend yield of 1.35%.
JPMorgan Chase & Co. (JPM)
JPM (NYSE:JPM) stock, a primary constituent of the S&P 500 ESG index, is on a roll, surging by nearly 10% in the past month and more than 25% year-over-year. Moreover, the stock is trading above its 50-, 100-, and 200-day moving averages, suggesting a momentum trend has emerged. Momentum investing can result in losses due to sudden mean reversion. However, fundamental aspects indicate that JPM stock’s momentum will be sustained.
The rationale for my claim about JPMorgan’s fundamental outlook stems from a pending interest rate pivot and rising credit spreads. The prior will lower JP Morgan’s funding costs, and the latter should allow sustained profitability from its interest-bearing activities, which span about 56.3% of its revenue mix.
Furthermore, lower interest rates may ramp up merger & acquisition activity due to capital availability, concurrently assisting JPMorgan’s investment banking activities. On top of that, depleted private market valuations provide scope for a flurry of acquisitions in a lower interest rate environment, which JPMorgan can intermediate.
JPM stock is well-placed from a capital market perspective. For example, JPM’s price-to-earnings ratio of 10.27x is at a near 10% discount to its 5-year average, and its dividend yield of 2.35% is enticing.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) continues to defy the odds with sustained growth. There will come a day when TSLA stock is fully priced in, leading to underwhelming performance from there on in. However, I do not think the marketplace fully captures its growth trajectory. The stock’s price-to-earnings ratio is at a cyclical discount of roughly 55.07%, showing that absolute value is in store.
TSLA stock has a bunch of near-term catalysts. For instance, Tesla’s fourth quarter deliveries report topped expectations by revealing 38% year-over-year growth to reach 1.81 million. Moreover, Tesla’s production rose by 35% to 1.85 million, communicating a strong demand outlook.
Furthermore, Tesla’s adjacent businesses are developing. According to Tesla’s latest earnings report, its energy generation and storage segment has grown by 40% year-over-year and now spans 5.2% of Tesla’s revenue mix. In addition, Tesla’s services and other revenues have progressed to 7.67% of the company’s total revenue after gaining 32% year-over-year. I’m trying to convey that Tesla is more than an EV company. Tesla is a vertically integrated firm set up for long-term growth prospects.
Tesla’s return on common equity ratio of 22.46% shows that its profit margins and shareholder value are best-in-class. Although Sustainalytics isn’t overly optimistic about Tesla’s ESG practices, TSLA stock is part of the S&P 500 ESG index, providing large-cap ESG investors with a solid option.
In essence, TSLA stock is set to benefit from embedded growth and ESG momentum.
On the date of publication, Steve Booyens held indirect long positions in UNH, JPM, and TSLA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.