5 Cheap Sustainable Stocks With Moats

If you are looking to invest in high-quality undervalued stocks with low environmental, social, and governance risk, Baxter International BAX, CNH CNH, Dow DOW, LyondellBasell LYB, and Charter Communications CHTR might be worth further research. For investors who are looking for sustainability characteristics, these companies not only have low ESG risk scores, indicating that the companies are exposed to fewer ESG risks, but they are also trading at an average price that’s at least 46% lower than their fair values, according to Morningstar.

In addition, they have been assigned a Morningstar Economic Moat Rating of narrow or wide by the analyst covering the stock, meaning that the company has a competitive advantage. Morningstar considers a company to have a narrow moat if it believes the company can fend off rivals for 10 years. Likewise, a wide moat is assigned to a company with a strong defense against competitors that Morningstar expects to last 20 years or more. Undervalued stocks with moats have a long track record of outperformance.

Morningstar US Sustainability Index

We found these stocks in the Morningstar US Sustainability Index, which targets stocks with low ESG risk ratings in the Morningstar US Large-Mid Cap Index. So far this year, the index has returned approximately 13.05%. In comparison, the SPDR S&P 500 Trust SPY has returned approximately 14.21%. Over the past five years, the sustainable index has returned approximately 14.07%, and SPDR S&P 500 Trust approximately 15.23%, on an annualized basis.

The Morningstar index has 328 stock holdings. A third of assets reside in the top 10 holdings of the index, which includes companies like Nvidia NVDA, Microsoft MSFT, and Visa V. Approximately 70% of the stocks within this index have a narrow or wide moat rating. The below-mentioned five stocks had the lowest price/fair value ratio in the index, indicating that they currently trade at prices much lower than the fair values Morningstar’s equity analysts have assigned them.

5 Cheap Sustainable Stocks

Baxter International BAX

Analyst: Julie Utterback, CFA

• Fair Value Estimate: $47.00
• Morningstar Rating: ★★★★★
• BAX is trading at a 52% discount.

“Baxter has dug a narrow moat around providing essential medical supplies and capital equipment. It claims top-tier positions in most of its product lines and typically competes with a concentrated group of peers. Overall, we think it would be difficult for new firms to enter its targeted niches primarily because of the intangible assets surrounding its proprietary products and the switching costs associated with some of them, both of which form the basis of Baxter’s moat.”

CNH Industrial CNH

Analyst: George Maglares

• Fair Value Estimate: $21.00
• Morningstar Rating: ★★★★★
• CNH is trading at a 51% discount.

“CNH has a stable balance sheet with industrial net/debt EBITDA of approximately 1.9 times and investment-grade credit ratings. The company generates cash and pays a dividend. Management repurchases shares with surplus cash in the absence of organic or inorganic growth opportunities. The company has historically been rather acquisitive, particularly regarding precision agriculture technology, though we believe it has assembled the bulk of the capabilities it needs to round out its technology stack. As a result, we would anticipate future acquisitions to be bolt-on in nature. We suspect management is satisfied with the current capital structure and that further share repurchases would be the preferred mode of shareholder remuneration in the absence of appropriate acquisition targets and modest growth in the dividend. The business is cyclical, and maintaining financial flexibility through cycle is essential.”

Dow DOW

Analyst: Seth Goldstein, CFA

• Fair Value Estimate: $45.00
• Morningstar Rating: ★★★★★
• DOW is trading at a 51% discount.

“We award Dow Chemical a narrow moat based on a cost advantage, due to its ethylene and propylene manufacturing operations in North America. Ethylene and propylene are crucial building blocks for myriad chemicals and plastics products with broad sweeping applications, including cosmetics, food packaging, and irrigation pipe, among countless others. Dow’s ethylene (and propylene) production operations fall within its packaging and specialty plastics segment, but these chemicals are used as inputs for its remaining business lines, leveraging its North American cost advantage across the firm as a whole.”

LyondellBasell Industries Holdings LYB

Analyst: Seth Goldstein, CFA

• Fair Value Estimate: $90.00
• Morningstar Rating: ★★★★★
• LYB is trading at a 48% discount.

“LyondellBasell is in solid financial health. Management reported a net debt/adjusted EBITDA ratio of 3.2 times as of June 30. We expect the leverage ratio will remain elevated over the near term as an economic slowdown weighs on volumes and profits. However, the firm should generate enough cash from operations to cover its capital expenditures.”

Charter Communications CHTR

Analyst: Michael Hodel, CFA

• Fair Value Estimate: $490.00
• Morningstar Rating: ★★★★★
• CHTR is trading at a 46% discount.

“We believe Charter possesses a narrow moat based on efficient scale and a cost advantage versus most of its rivals, offset in part by limited growth potential as rival networks improve. The firm also produces relatively meager returns on capital, thanks largely to the 2016 acquisitions that formed the company.”