HECO: Socially Responsible Investing Backed By Strong Earnings

Socially responsible investing combines the ambition to make money with the motivation to enact positive change in the world.  It is a popular approach to finance that has been around for decades. However, in recent years, the concept has been catching on at an even faster pace.  

Since 2017, global investments based on ethical and social principles have increased by 34% and reached $30.7 trillion.  In the U.S. alone, one in every six dollars under professional asset management is invested using socially responsible financial strategies.  New research from Morningstar suggests these trends will continue growing, as nearly three-fourths of all investors are at least “moderately interested” in devoting long-term savings to sustainable investments.

One selection following these investment objectives is the Strategy Shares EcoLogical Strategy Fund (NYSEARCA: HECO).  The underlying strategies guiding the ETF seek long-term capital appreciation, are ecologically focused, and backed by strong earnings results in core stock holdings.  Since inception, investments in the Strategy Shares EcoLogical Strategy Fund have outperformed the MSCI ACWI TR Index by 7.36%.

To achieve these goals of sustainability, the Strategy Shares EcoLogical Strategy Fund focuses on companies that are components of recognized environmentally focused indices.  Investment strategies apply strict criteria to identify global businesses with emerging projects positioned to benefit from ecologically conscious legislation and cultural shifts in market consumption.  

During periods of normal market volatility, at least 80% of the portfolio allocation is devoted to green bonds, mutual funds, ETFs, equity, and fixed-income securities of ecologically-focused companies.  At least 65% of total allocation is devoted to common stocks and fixed-income securities of ecologically-focused companies based in the U.S. The remaining portion of the allocation is devoted to ADRs and stocks connected to ecologically-focused businesses that are based outside the U.S.

The Strategy Shares EcoLogical Strategy Fund is broadly diversified across industry sectors and its positive outlook is supported by notable earnings results that have been generated during the market’s most recent reporting period.

During the first-quarter, casualty and property insurer Travelers Companies (NYSE: TRV) beat the market’s consensus earnings forecasts on underwriting improvements and significant declines in catastrophe losses.  Core earnings posted at $2.83 per share, with nearly $800 million in net income for the period.

The EPS figure indicates annualized gains of 17% and the performance surpassed analyst expectations ($2.72 per share) by 4.04%.  The revenue figure indicated annualized gains of 5.2% (at $7.67 billion) and comfortably surpassed Wall Street’s estimates calling for revenues of $7.1 billion.  Catastrophe losses dropped by 45.5% on an annualized basis (to $193 million) and written premiums rose to $7.06 billion (a gain of 3.5%). Shares of Travelers Companies stock currently show YTD gains of 23.54%.

Another market sector that continues to generate enhanced returns can be found in traditional payment networks.  Major credit card companies have shown strength in digital payments to overcome disruption efforts of big tech companies like Apple, Inc. (NASDAQ: AAPL) and others.  To capitalize on these trends, the Strategy Shares EcoLogical Strategy Fund includes exposure to these traditional payment networks with two names that have outperformed the S&P 500 by a wide margin in 2019.

Mastercard (NYSE: MA) released first-quarter results that beat market forecasts for both earnings and revenue.  Solid transaction volumes and a lift from new products/services propelled net income to $1.9 billion (EPS of $1.80).  This represents a gain of 26.7% relative to the $1.5 billion in net income (EPS of $1.41) posted during the same period last year.  

Mastercard’s adjusted earnings were $1.78 per share during its most recent reporting period, which represents an annualized gain of 18.7% and was firmly above the market’s consensus estimates ($1.66 per share).  Revenues increased from $3.58 billion last year to $3.89 billion (a gain of 6.7%) and this also beat analysts forecasts of $3.85 billion. Mastercard stock shares currently show YTD gains of 33.31%.

Visa (NYSE: V) shares continue to reach new highs, even in cases where the rest of the market is declining.  The company’s most recent quarterly report showed annualized gains of 8% in net revenues (at $5.5 billion) and a 17% annualized gain the bottom-line figure (EPS of $1.31).  Payment volumes were higher by 8% (to $2.1 trillion) and this was accompanied by an increase of 9% in the number of total transactions (to 47.4 billion). Share repurchases of $2 billion also boosted EPS for the period.  

Visa’s revenue growth did show some evidence of slowing but management has noted rising volatility in currency markets as a peripheral factor which may prove to be temporary in nature.  Shares of Visa stock currently show YTD gains of 23.27%.

Key names in the technology sector (which represents 42.29% of allocation) include Adobe (NASDAQ: ADBE), which also beat Wall Street’s earnings targets for the fiscal first-quarter with adjusted EPS of $1.71 and sales of $2.6 billion.  Consensus estimates were calling for EPS of $1.62 on sales of $2.55 billion. On an annualized basis, this performance indicates sales gains of 25% and EPS gains of 10%.  

Current-quarter earnings guidance was reduced to an adjusted $1.77 per share (with sales figures expected to come in at $2.7 billion).  Previously, Wall Street analysts modeled second-quarter earnings of $1.88 per share on sales of $2.72 billion. However, even with these recent reductions, it should be noted that Adobe’s updated guidance implies annualized sales gains of 23.6% and earnings gains of 6.63%.  Adobe shares are currently showing YTD gains of 21.45%.

For investors seeking well-diversified, long-term capital appreciation through ecologically focused investment strategies, the Strategy Shares EcoLogical Strategy Fund is one name that should be on the radar.  Even with its recent moves higher, shares of HECO are still trading below their long-term premium/discount averages. This suggests that the Strategy Shares EcoLogical Strategy Fund is attractively valued at current levels.  As core holdings continue to show evidence of consistent earnings strength, HECO finds itself in a strong position to continue producing gains in 2019.