4 Stocks Poised to Fall as the Dollar Rebounds

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

The U.S. dollar has strengthened materially over the last few weeks, as the dollar index has climbed by nearly 4%, but the recent run-up may just the start of a more substantial rise. An analysis of the technical chart suggests that the dollar may be on the verge of getting much stronger, rising by perhaps as much as 8.5%. The recent strength in the dollar has come amid a strengthening U.S. economy and recent softness in the eurozone. 

The weak dollar has aided companies like McDonald's Corp. (MCD), Nike Inc. (NKE ), Johnson & Johnson (JNJ) and Under Armour (UAA,UA) during the most recent quarter, helping to boost revenues. But the benefits the dollar has provided to these companies may soon become a potential problem to their bottom lines and their stock prices. 

Dollar Breakout

The chart of the dollar index tells the tale of a currency that has bottomed around $88.50 to $90.50, finding a clear support region. The dollar index has already increased above two critical resistance levels, at $90.50 and then $91.90, while a minor resistance currently still stands around $93.90. But the more likely scenario results in a breakout sending the dollar index sharply higher all the way up to $100.50, a jump of about 8.5%. 

McDonald's

McDonald's recent quarterly results are a perfect illustration of a company that saw a significant benefit from a weak dollar. In fact, revenue for McDonald's would have been down by nearly 15% in the quarter had it not been for a weak dollar. The benefit of the weak dollar resulted in revenue falling by 9%. It also helped to boost the earnings per share by 17%. Excluding the dollar weakness, profits would have only increased by 12%. (See also: Why McDonald's Big Stock Rally Won't Last.)

MCD Quarterly Revenue Estimates data by YCharts

Nike

Nike is no different, with its fiscal third-quarter results on March 22 showing revenue growth of 7%. Without the benefit of a weak dollar, growth would have only been 3%. In fact, Nike only gets 40% of its total revenue from North America, with the balance coming from the rest of the globe. 

What About Estimates?

Should the dollar continue to strengthen, analysts may very well start having to lower revenue and earnings estimates for companies such as the ones above. The other possibility: They don't reduce those estimates, resulting in surprise revenue and earnings misses in the future. 

Presently, a strong dollar is one of the biggest headwinds companies like McDonald's and Nike may be facing in the near term should the dollar breakout result in an even stronger dollar. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.