The U.S. Dollar has appreciated more than 7% against a basket of currencies since the end of March. While that might not seem like a lot, it's huge for a developed currency and can cause a lot of problems in a lot of different ways.
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Mostly positive second-quarter earnings were overshadowed by warnings of a stronger dollar and weaker profits for U.S. companies with international exposure.
From Netflix to Illinois Tool Works, management was downbeat as weaker foreign currencies meant lower sales in those markets when converted back to dollars.
The dollar isn't likely to keep appreciating and could resume its long-term slide against other currencies. That means a short-lived opportunity for U.S. investors to pick up some best-of-breed international names at bargain basement prices.
How A Stronger Dollar Might Be An Opportunity For U.S. Investors
A more hawkish Federal Reserve and higher interest rates have taken much but not all of the blame for the stronger dollar. The U.S. economy is outperforming most other developed nations, and geopolitical issues with Turkey and Brexit have resulted in an exodus to U.S. Treasuries and the dollar.
While a stronger greenback may help allay inflation fears by lowering prices for imports into the country, it also makes U.S. exports more expensive. The timing couldn't be worse as tariffs go up on U.S. products sold overseas while other countries get a boost from their own weakened currencies.
The greenback has been supported as the world's reserve currency since the late '60s, but trillion-dollar deficits all but guarantee the long-term trend downward.
The value of the dollar against a basket of currencies has spiked during economic crises but has trended lower from 120 in 1967 to 90 over the five decades to start this year.
It might be a short-lived opportunity for American investors. Higher interest rates will eventually start to weigh on the economy -- both lowering the attractiveness of U.S. assets and slowing the Fed's pace of increases. While the Fed is well ahead of other central banks, the ECB and Bank of Japan are expected to start their own exits from monetary easing soon, which should boost the value of their currencies.
In the short-term, dollar strength may also produce push-back from our own government.
Treasury Secretary Mnuchin and President Trump have both publicly come out against a strong dollar for export reasons in January and July though statements have been walked back somewhat. Trump tweeted on July 20 that a strengthening dollars was "taking away our big competitive advantage."
Taking Advantage Of The Short-Term Dollar Strength
American investors are notoriously under-invested in international stocks. Many argue that the 45% sales exposure to international markets from S&P 500 companies is diversification enough. Owning shares of foreign companies directly helps further diversify your wealth away from weakness in the U.S. economy and currency risk around the dollar.
The dollar index has spent most of the last 50 years below the 100-level and the long-term trend is to dollar weakness against a rising China and other emerging heavyweights. Trillion-dollar deficits could force borrowing costs higher, weighing on the economy and U.S. assets. This all translates to the need for foreign diversification and what could amount to a quick bump in international stock prices as the greenback drops.
British American Tobacco (NYSE: BTI) has used strategic acquisitions to cement its place among global tobacco brands with the Reynolds American acquisition last year and the Lorillard purchase in 2015. In an industry under significant regulatory pressure, the acquisitions have helped British American deliver 1% to 2% annual volume share growth in a market suffering declining volumes for the core product.
The company has combined this strategy with its lead in smokeless (heated) tobacco to produce 3% to 5% revenue growth and an annualized 10% earnings growth since 2000.
A plateau of heated tobacco sales in Japan in the first quarter shook the industry relying on the next generation of products. British American is the market leader globally for heated products and has seen its shares plunge 12.6% over the last year.
Shares now trade for 16 times full year 2018 expected earnings and pay a solid 4.9% dividend yield. The company is working to bring down the cost of vape pens, which are seen as the primary deterrent to growth in the heated segment, and should continue to produce solid cash flow.
Cemex (NYSE: CX) has seen its shares plunge 27% over the last year as enthusiasm for an infrastructure boom waned and U.S.-Mexico relations soured. The company books a quarter of its sales from each of its three biggest markets -- Mexico, Europe, and the United States -- with another 15% from South and Central America.
U.S.-Mexico relations appear to be thawing with a NAFTA renegotiation deal possible and the new president in Mexico is expected to boost infrastructure spending after years of neglect.
The global recession hit cement sales hard and producers have struggled to survive. Cemex was left burdened with billions in debt that it has since fought to repay. Management plans on up to $2 billion in asset sales by 2020 to reduce long-term debt to $3.5 billion after paying off over $2 billion last year.
On the turnaround plan, management believes it can reinstate the dividend in 2019. Working in its favor is massive materials reserves of 70 years' for cement production and 30 years' worth of aggregate reserves.
Shares trade for 11 times full year 2018 expected earnings of $0.59 per share, just over double last year's EPS reported.
ABB Ltd (NYSE: ABB) is a leader in industrial equipment and systems and holds one of the top two market share spots in all its core markets against competitors like GE and Siemens. The company has used its leadership position and an efficiency program to hold shares to a decline of just 1% over the last year versus a loss of 50% and 4% for its two largest competitors.
The company has been bottom-fishing for cheap acquisitions lately, using its relatively clean balance sheet to take advantage of weaker rivals. ABB completed its acquisition of B&R, a software-based solutions provider for factory automation, last year and is expected to close on its acquisition of GE's low-voltage business this year.
Sales have been flat for the last three years as industrial capital expenditures stagnated, but the company has a $34.4 billion backlog of orders (a full year's worth of revenue). Shares traded for 15.4 times full year 2018 expected earnings and pay an attractive 3.7% dividend yield.
Risks To Consider: An America-First agenda could further crowd out international companies in the U.S. market though global growth should continue to support fundamentals.
Action To Take: Take advantage of dollar strength to buy relatively cheaper foreign stocks for an internationally-diversified portfolio in best-of-breed companies.