How I’m Investing In A Strong-Dollar Market
My wife and I are planning to visit Europe soon. Deciding exactly where to go is proving difficult: historic German castles and biergartens, quaint Irish country inns, moonlit Italian dining… There are just too many things to see.
Regardless of whether we fly to Munich, Dublin or somewhere else, our budget will stretch much further these days thanks to the strong dollar.
Two years ago, the dollar was equivalent to 0.70 euros. Today, the same greenback will get you 0.90 euros. So if you set aside $1,000 in spending money back then and went to a bank to exchange it, you would have walked out with 700 euros to spend. Today, the same outlay will put 900 euros in your pocket.
This favorable exchange means my wife and I can enjoy better meals, stay in nicer hotels, and visit more attractions — all without spending a single extra dollar.
You can see why travelers love this strong dollar. Unfortunately, large businesses hate it. U.S.-made goods exported overseas have become more expensive for foreign buyers. Compounding matters, any sales based in euros, yen or rupees are being converted back into fewer dollars — causing revenue and profit to shrink when earnings are reported.
This has become a real problem for most multinational companies.
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Take Procter & Gamble (NYSE: PG), whose household consumer products are available in 180 countries across the globe. Last year, the company reported a 5% decline in net revenues, but currency translation had a negative impact of 6%. Gross sales were actually up about $800 million in local terms. But that was more than offset by a $4.8 billion erosion in the exchange rate.
Even for a company this size, that’s a big bite.
How about McDonald’s (NYSE: MCD)? Well, the company earned about 5% more last year worldwide. But that 5% pre-currency earnings increase turned into a 5% post-currency decrease.
Just about every company with overseas operations is citing the same drag on sales and profits. Coca-Cola (NYSE: KO), Pfizer (NYSE: PFE), IBM (NYSE: IBM)… the list goes on.
Many are surrendering billions to currency translation each quarter — cash that would have otherwise been available for dividends, debt reduction, growth initiatives and other uses. No wonder so many investors have been shunning large blue-chips (many of which, like P&G, make more than 50% of their sales overseas) in favor of smaller companies.
But let’s carry this situation out to its logical conclusion. If appreciating domestic currency is subtracting profit, then wouldn’t depreciating domestic currency add profit? Answer that question, and you’re one big step ahead of the crowd.
A Strong Dollar Is Good News For These Stocks
If the strong dollar hurts U.S. companies, then it stands to reason that weak foreign currencies would conversely be helpful to businesses in those respective countries. How helpful? Well that depends on how far the currency has dropped vis-a-vis those of other trading partners.
You might see where I’m going with this. Currency translation can either work for you, or against you. Right now, it’s slowing down the progress of most American companies, which might have to produce 10% growth in local terms just to report 5% growth on the books. But elsewhere, this headwind is a tailwind, pushing the 10% grower ahead 15%.
That’s another reason I’m thrilled to have recently added an international component to the portfolio of my premium newsletter, High-Yield Investing.
There is one country in particular whose currency has tumbled. In fact, it’s at the lowest levels against the dollar in 31 years. And that can be a huge advantage for businesses located there.
I’m talking about the United Kingdom.
The good-old pound sterling was already under pressure before the so-called “Brexit”. But in the aftermath of the June 23 vote, the pound slipped all the way to $1.31. Just a few days earlier, each pound was worth $1.50. For a currency, this is a jaw-dropping decline (the sharpest in half a century).
In fact, the last time the pound was this weak, Ronald Reagan was President.
So let’s reverse the Procter & Gamble scenario above. When English companies sell a product denominated in dollars, those sales will now be converted back into more pounds than they would have before. That will have the effect of accelerating any local growth — rather than decelerating it.
Could the pound bounce back? Of course it could. But it has a long way to go before reaching historical norms. And few analysts see a rebound on the horizon — the consensus is for a further decline toward $1.15.
This won’t help every company in the U.K., but there are some definite winners.
If U.S. pharmaceuticals like Pfizer are struggling because of strong currency, then British pharmaceuticals are jumping for joy. GlaxoSmithKline (NYSE: GSK) may be based near London, but its vaccines and drug treatments are sold worldwide. In fact, more than 90% of its revenues are generated outside of England.
Seeing the potential benefit, investors have pushed the stock as high as $44.41 this week, up from $42.56 the day before the Brexit vote.
BP (NYSE: BP) is another company poised to benefit, since much of the firm’s oil production fetches dollars rather than pounds or euros. Like GSK, BP has gained ground since the breakaway vote, climbing as high as $36.91 from $34.63.
I’m also watching Diageo (NYSE: DEO). The liquor producer makes and distributes numerous top brands of vodka, rum, whisky, scotch and beer, many of which are highly popular with U.S. consumers. The falling pound has already propelled the stock to $115.36 from $109.76, even before the financial impact begins to show up on quarterly reports.
My advice: In High-Yield Investing, we’re going to keep an eye on international stocks and do our homework to find companies that are based in countries where the home currency has plummeted against the dollar. You should do the same. Make sure they generate the bulk of their sales overseas — ideally in the U.S. Many of the top international names out there pay top-notch dividends, too, so you’ll have the chance to buy in at a time when these tailwinds could lead to substantial payment increases.
If you want to know more about how my subscribers and I plan to profit from this situation, simply follow this link.