The U.S. dollar's moves have been big news lately, and despite the currency's recent minor stabilization, the long-term trend of the dollar is down. After rising throughout most of 2008 as the credit crisis unfolded and people sought the safety of the dollar, the greenback has been on a sustained slide for the past 12 months, going from nearly 89 to its recent 76 level.
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I won't debate the long-term benefits or detriments of a falling dollar. What's important for investors to know today is that many companies will see EPS benefits from the lower dollar via international sales and commodity price gains in the coming year.
When companies report earnings they do so versus the year ago quarter, so even if the dollar stages a huge rally in the coming months, companies that sell lots of goods overseas will see tailwinds to earnings over the next few quarters. In addition, a falling dollar leads to higher prices for commodities like gold, copper, aluminum and crude oil, and investors can position themselves to benefit from these trends as well. (For more, on this topic, check out Taking Advantage Of A Weak U.S. Dollar.)
Here are five stocks that will increasingly find tailwinds from a lower dollar as 2010 progresses. They include commodity stocks and companies that generate more than 50% of sales overseas.
Freeport is a megadriller that specializes in copper production but also mines a great deal of gold (the ultra inflation play) and a metal called molybdenum that is used in the production of steel and certain chemicals. While the correlation isn't always 100%, it's generally a good bet that a low dollar leads to higher prices for gold. (For more, see 8 Reasons To Own Gold.)
Freeport's stock price has rallied tremendously ever since last fall when the company cut its dividend and copper stood less than $1.50 per pound. Copper spot prices now sit just below $3, while gold has been hitting new nominal highs for the past few weeks.
The eponymous maker of toothpaste, cleaning goods and other home products has a reputation for being one of the most sensitive companies to swings the dollar. More than 80% of sales come from overseas, as the company has a huge presence in emerging market regions like Latin America and Asia.
While Colgate-Palmolive does some currency hedging to mitigate huge swings, the company still stands to see quite favorable sales and EPS conversions in the next few quarters, as year-over-year comparisons will increasingly be against higher dollar levels than today.
The maker of construction and mining equipment has been growing its global presence substantially in recent years, as international sales have gone from around 30% to nearly 60% today.
Sales to emerging markets like China, India, and Brazil have zoomed as these nations look to get their infrastructure projects off the ground, and stimulus measures in the U.S. as well as rising mining profits should help to boost Cat's sales in future quarters.
Newmont Mining (NYSE:NEM)
Newmont is the second largest gold producer in the world, and is a very concentrated play on a lower dollar as well as higher inflation expectations going forward.
India's central bank this week bought 200 metric tonnes of gold from the IMF at full market prices; it was the largest buy in the nation's history and a reflection of the desire of many countries to diversify away from paper currencies. Since most foreign nations diversify by purchasing dollar assets, this news could be part of a growing trend that would put further pressure on the dollar.
While the majority of Newmont's revenues come from overseas, there is some mitigation in that many of the company's operations are based overseas. The low dollar benefit is only pure-blooded when your production costs are in dollars and your sales are in another currency. But Newmont should get some benefit via international sales and some via the inverse dollar vs. gold relationship.
Aflac Inc. (NYSE:AFL)
By now we all know the duck. This unique insurer has certainly made quite the brand name for itself in the past decade. But what's astonishing is that the Japanese love the duck much more than we do over here. Aflac gets over 70% of sales from the tiny island nation alone! So while the low-dollar play is certainly alive in this stock, investors should know that the dollar/yen relationship is driving any potential benefit.
Opinions vary widely on the long-term effects to the U.S. economy of a low dollar. While these companies any many others will benefit, the prices of imports like oil, auto and electronics will rise. Investors should allow themselves to have some "leverage" to this trend, as it may stay in place for some time. (For related reading, see How U.S. Firms Benefit When The Dollar Falls.)
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