5 Investments That Will Profit from a Falling Dollar

Before the economic crisis took hold, the U.S. dollar began a steady downward drift as global investors started to realize that economic growth would be more robust elsewhere in the world. The dollar’s slump was also due to never-ending trade deficits, which had long been expected to weaken the greenback, and finally did so beginning in late 2004. During the next 30 months, the U.S. dollar, compared to the euro, fell from 0.86 euros to 0.63 — a -25% drop.

With concerns about the global economic crisis receding, the dollar is back on a downward path. As I noted recently, the dollar “now stands at all-time lows against the Australian dollar and the Swiss franc, a 15-year low against the Japanese yen, and more recent lows against the euro.” [What the Global Currency Wars Mean for Your Portfolio] That recent downward move should have an almost immediate impact: export-related profits are bound to come in higher than forecasts in the fourth quarter of 2010 and the first quarter of 2011 as those earnings get repatriated back into dollars.

Yet it’s the long-term impact that investors need to embrace. Not only are foreign-earned profits likely to be pumped up by further dollar weakness, but the competitive positioning of U.S. firms is also bound to improve, setting the stage for rising market share.

Of course, many exporters also have operations in foreign countries, so their expenses will also rise. So if you’re looking to cash in on the potential export surge, then it pays to focus on companies with a still-considerable manufacturing presence here in the United States.

Here’s a look at five industries and representative companies that I will think will flourish from a weaker dollar…

1. Industrials — Illinois Tool Works (NYSE: ITW)
Of all of the industries that comprise U.S. exports, the industrial sector is the largest by far, with more than $100 billion in manufactured goods shipped abroad annually. Among the major exporters, it’s almost impossible to find companies that don’t also manufacture some of their production abroad, and Illinois Tool Works is no exception. But this company has ample flexibility and can easily migrate some of that foreign production back to the U.S., as its domestic manufacturing base is under-utilized.

The weak dollar scenario could be a real boon to the company, which faces serious local competition in the international marketplace. Its 800 divisions have a chance to pick up market share, helping sales rise from a projected $15.7 billion in 2010 toward the $20 billion mark in coming years.

2. Agriculture — Smithfield Foods (NYSE: SFD)
The U.S. has become an impressive exporter of commodities — a trend that will only be strengthened if the dollar continues to slump further. Yet it’s our livestock that could be the real trade winner. Did you know that Japan is the largest market for imported pork in the world? And did you know that China, which consumes 50% of the world’s pork, is at maximum production and may soon become a pork importer? That means China will be ill-equipped to supply the Japanese market, and we here in the U.S. stand to post rising pork exports — especially as the dollar weakens.

Smithfield Foods, which I profiled in this piece, is the world’s largest producer of pork. Right now, Smithfield is looking to restrain output to help boost prices. But as global demand for pork exports rises, Smithfield won’t have to worry about constraining output much longer.

3. Mutual Funds — Fidelity Export and Multinational Fund (Nasdaq: FEXPX)
This fund has returned just +0.8% on an annualized basis for the past five years. That’s right in line with the S&P 500. But a weaker dollar changes everything for this fund. It helps pump up earnings for the companies in its portfolio, and it helps them take market share. This play may be especially timely, as a number of its holdings are likely to speak about the benefits of a weaker dollar in their upcoming conference calls.

The Fidelity Export Fund’s top five holdings are: ExxonMobil (NYSE: XOM), Apple (Nasdaq: AAPL), Johnson & Johnson (NYSE: JNJ), GE (NYSE: GE) and Procter & Gamble (NYSE: PG).

4. Media — Disney (NYSE: DIS)
Despite the occasional cultural war, we remain the undisputed kings of global entertainment. Many countries heavily subsidize local film industries to help create domestic blockbusters, but it’s the U.S. blockbusters that often take home the local gold in terms of box office receipts. Disney, with interests in theme parks, Pixar movie studios, cruise ships and other forms of entertainment, is truly a global brand. Disney, like other media firms, will be hard-pressed to boost market share simply because the dollar is cheaper, but those foreign-earned profits are likely to be worth even more as the dollar slips further.

Before the global economic crisis hit, Disney was on its way to become a profit powerhouse as EPS grew more than +30% in 2006 and 2007 and topped out at $2.28. Profits subsequently slumped in the economic downturn, but should return to pre-recession levels this year. It may not be long before Disney resumes that upward profit surge: analysts think per share profits can approach $3 by 2012 or 2013. Not bad for a $34 stock with such strong global brand cachet.

5. Software — Oracle (Nasdaq: ORCL)
I’m hesitant to include this stock after it has had a recent strong run, but you can’t ignore the appeal of this sector when talking about the global trade picture. Oracle’s software is not a price-sensitive product. But the after-market support the company sells in terms of service contracts sure is.

Oracle often needs to make major price concessions on these service contracts to win business away from rival SAP (NYSE: SAP), whose business is denominated in euros. Oracle’s business is done in dollars. In a world of cheaper dollars, Oracle can either cut price in the local currency and take market share, or maintain price and boost margins as the dollar falls farther. It’s a nice problem to have, and can be said of many other tech powerhouse such as Hewlett-Packard (NYSE: HPQ), Microsoft (Nasdaq: MSFT) or IBM (NYSE: IBM).

Action to Take –> There are already compelling reasons to own these stocks, but a falling dollar makes it all the more tempting to consider these names. Not only that, but a busier export sector creates a virtuous cycle, as support businesses receive more orders to help provide goods and services to these large firms.

The Obama administration realizes the power of a weak dollar, which is why we don’t read much about the U.S.’s “strong dollar” approach anymore. Keep an eye on the currency markets. If the dollar’s recent slide continues, you can expect to start hearing about these export plays all over Wall Street.