The Rising U.S. Dollar Index Will Nail Multinationals – So Do This Now

October 21st, 2014
in contributors

Money Morning Article of the Week

by David Zeiler, Associate Editor, Money Morning

Multinational stocks have started to feel some negative ripple effects of the rising U.S. dollar index.

While a rising U.S. dollar index can have benefits, companies with a lot of global business face reduced sales and profits as their goods grow more expensive.

Follow up:

The stronger U.S. dollar has already hit Ford Motor Co. (NYSE: F).

Weaker sales in Europe and emerging markets have forced Ford to cut its projected 2014 pre-tax profit from the $7 billion to $8 billion range to $6 billion. Unhappy investors have pushed Ford stock down more than 15% since that Sept. 29 announcement.

Gina Sanchez, a Chantico Global told CNBC:

"This is a big deal for U.S. companies that are really starting to feel the pain in the bottom line. We're also starting to see the strong dollar seep in. It's depressing currencies all around the emerging markets, and that's also starting to hurt anybody who is selling abroad."

And the U.S. dollar climb is not over...

Why the Rising U.S. Dollar Index Will Keep Going Up

The greenback has been on a tear since July 1. The U.S. dollar index, which charts the strength of the dollar against six world currencies, is up nearly 7.6% since then. In fact, the index just enjoyed its biggest quarterly increase since 2008.

In the short term, the U.S. dollar index only figures to get stronger. That's because the central bankers of other major currencies, namely the European Central Bank and the Bank of Japan, are committed to policies of weakening their currencies.

Meanwhile, the U.S. Federal Reserve will end one of its currency-weakening policies, quantitative easing, at the end of the month. And several Fed governors have suggested the U.S. central bank will start to raise interest rates at some point next year. That will further bolster the U.S. dollar.

And the stronger U.S. dollar isn't the only concern for multinationals. Emerging economies are struggling, as is Europe. Even the China growth engine is slowing.

Of course, a strong U.S. dollar makes those issues worse.

For U.S. companies with substantial overseas sales, this means an extended period of pain.

So which companies will get hurt the most by the rising U.S. dollar index?

Here are the companies investors need to watch, and the best strategy for dealing with this situation.

Who Gets Hurt by the Rising U.S. Dollar Index - And What To Do About It

Several sectors are particularly vulnerable to a rising U.S. dollar:

  • Consumer staple companies, such as The Coca-Cola Co. (NYSE: KO), Yum! Brands Inc. (NYSE: YUM), and The Procter & Gamble Co. (NYSE: PG).
  • Large industrials like General Electric Co. (NYSE: GE), 3M Co. (NYSE: MMM), and United Technologies Corp. (NYSE: UTX).
  • Tech companies like Google Inc. (Nasdaq: GOOG), Apple Inc. (Nasdaq: AAPL), International Business Machines Corp. (NYSE: IBM), Facebook Inc. (Nasdaq: FB) and Priceline Group Inc. (Nasdaq: PCLN) all derive more than half their revenues from outside the United States. For Priceline, it's a whopping 75%.
  • Virtually all oil and gas companies, because the stronger U.S. dollar is driving oil prices lower. This includes titans like ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) as well as dozens of smaller players.

The knee-jerk reaction would be to strictly avoid the sectors affected by the rising U.S. dollar index, and dump any stocks you own that fall in those sectors. Bad idea.

A much better strategy, says Money Morning Chief Investing Strategist Keith Fitz-Gerald, a seasoned market analyst with 33 years of experience, is to use the price declines as an opportunity to buy some high-quality companies on sale.

The key is to pick out stocks in these sectors that otherwise have strong fundamentals and healthy prospects for growth. Those are the ones that will bounce back with a vengeance when the U.S. dollar eventually weakens.

Fitz-Gerald particularly likes several stocks that have been hit by the rising U.S. dollar's impact on the oil and gas market: Teekay LNG partners (NYSE: TGP), Brookfield Asset Management Inc. (NYSE: BAM), and Northern Tier Energy LP (NYSE: NTI).

Fitz-Gerald said:

"These companies - temporarily out of favor thanks to more expensive commodities - will be back again in a big way once the status quo reasserts itself."

The Ideal Strategy for Buying Stocks Hurt by a Stronger U.S. Dollar

But rather than trying to time when these stocks will bottom out, Fitz-Gerald recommends dollar-cost averaging. It's simple but effective.

Fitz-Gerald explains:

"Dollar-cost averaging is a trading technique that commits users to buying a fixed-dollar amount of a company on a regular schedule, typically monthly, regardless of trends in share price. It's a strategy that helps its users ensure that they buy more shares at low prices, making their overall investment look like a 'buy low, sell high' strategy executed to perfection."

And because the dollar amount of the investment is fixed, you buy fewer shares when the stock price rises.

Fitz-Gerald said:

"If prices somehow fall sharply over the next few months? Great - you can scoop up even more shares at a bargain price as long as you stick to both your 'schedule' and your purchasing, And if they climb unexpectedly quickly? That's fine, too - you've locked in profits!"

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