CGGO - CGGO ETF: Selected High Quality Global Growth

2023-09-14 20:47:31 ET

Summary

• CGGO is an actively managed ETF by Capital Group with a portfolio that has a 12% weighted consensus upside and low debt.
• The current ETF holdings have a consensus EPS growth rate of 18% and 13% in YE23 & YE24 respectively.
• The portfolio consists of high-quality companies with global reach and potential for organic growth and M&A prospects.

Overview

Capital Group, founded in 1932 with US$2.2 trillion in assets under management, launched its first ETFs in 2022 that included the ( CGGO ) the Capital Group Global Growth Equity ETF . This is an actively managed ETF that utilizes the Capital Group's extensive research and information reach. In my view, Capital is as close to an insider as one can get without crossing the line. Their large positions in most stocks they own provides direct top management access, perhaps better than many Wall Street analysts.

This research depth and management access across the globe should provide some competitive advantages when picking stocks. Before diving into the nuts and bolts of the portfolio holdings, I compared one of the top capital mutual funds vs the SP500 over a 50yr period. The rationale is that since this is an active fund, who and how it's managed is vitally important given that the composition open to judgement and changes vs a passive or indexed fund.

As can be seen The Growth Fund of America has outperformed the SP500 ( SPX ) for most of a 50yr period albeit with greater volatility.

Short Track Record

CGGO has modestly outperformed the SP500 and MSCI World Index (MXWO) over the last 12 months by 2.5%. However, this is not a long enough track record to make an informed investment decision, which is why I looked at Capital Group's track record.

Looking Under the Hood

Using consensus estimates such as EPS, Revenue, EBITDA, Net Debt and price targets for 75% of the CGGO portfolio, I calculated that the current holdings have a weighted upside of 12%, EPS CAGR of 8% with a PE of 19x for a PEG of 2.3x as of September 9 ^th , 2023.

In my view, this is a portfolio of very high-quality companies with global reach that have key drivers that may accelerate organic growth plus M&A prospects given low leverage. It is not a cheap or value portfolio, which is intrinsic in the name and stated strategy. Key to meeting or surpassing the consensus upside is if the mangers see a potential for results to surpass expectations and drive valuations higher.

On the Capital Group webpages, they share the house global investment views. In summary, they believe that the end of free money will require greater selection away from the mega caps and a more global vs US focus to find alpha.

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Growth Outlook

As can be seen in the consensus numbers, the portfolio has some very high growth stocks such as Samsung ( SSNLF ), NVIDIA ( NVDA ) and Eli Lilly ( LLY ) with over 20% EPS CAGR. However, the weighted EPS CAGR is a more conservative 8%. As an active ETF the managers can reposition and rebalance the portfolio to seek higher growth. If insight, conviction, and fundamentals warrant exiting/adding stocks or increasing weights can be expected to occur.

Leverage and Cash Flow

This portfolio also has an interesting fundament characteristic, the stocks are near debt free (Net Debt/EBITDA of .7x) and generate high free cash flow (5% of revenue) despite solid growth rates. This generally means that the companies have high margins and/or capital discipline. This provides added opportunities in M&A, dividends or share buybacks along with making most immune to higher rates.

Valuation

On consensus EPS estimates, the current holdings have a weighted PEG of 2.3x, given a PE of 19x and EPS CAGR of 8%. This is not a value portfolio, and I assume the managers see greater potential growth than consensus. Some stocks that stand out are Samsung, Canadian Natural Resources ( CNQ ), Taiwan Semi ( TSM ) and Renault ( RNSDF )

Key Risk

As an active global strategy, the CGGO has inherently greater risks vs a passive global index ETF such as the iShares MSCI ACWI ETF ( ACWI ). There is concentration and selection risk, the ACWI, for example, has 2,396 stocks vs CGGO's 88 positions, this makes it potentially far more volatile. This higher portfolio concentration and selection can also magnify specific sector, currency, and country risks. In short, an investor needs to be comfortable with Capital Group's management capabilities.

Conclusion

I rate the CGGO ETF a BUY. I’m very comfortable with Capital Group's strategy, research, and execution to deliver solid and consistent performance. The current portfolio of high-quality global growth stocks combined with active management has the flexibility to manage downside exposure far better than most passive or indexed funds, in my view.

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