Much has been made about how the stronger U.S. dollar is hurting corporate profits. And rightfully so.
Approximately 46% of all revenues for the S&P 500 come from outside of the United States. A strong dollar makes American goods comparatively more expensive and foreign earnings worth less when translated back to U.S. dollars. And, oh, how the dollar has strengthened:
That creates a major headwind for multinational firms which export a large percentage of their goods overseas. And it is a big reason why many companies have issued very tepid 2015 guidance, leading analysts to slash their earnings estimates.
This could lead to what many are calling an earnings recession in the first half of 2015, or two consecutive quarters of negative earnings growth.
Strong Dollar Winners and Losers
Of course, some sectors are more exposed to a stronger dollar than others. Information Technology derives more revenue from outside of the U.S. than any other at 57%. Energy is not far behind at 55%.
However, other sectors are essentially immune from currency fluctuations. Both Utilities and Telecom derive virtually none of their revenue from overseas.
Additionally, small caps, on average, have less overseas exposure than large caps. Just 19% of sales for the small cap Russell 2000 index come from outside of the U.S.
However, there are some companies that should actually benefit from a strong U.S. dollar.
In particular, companies that derive most of their revenue here in the United States but who have most of their costs overseas in other currencies should benefit as the rising dollar boosts their profit margins.
Think about a company that sells widgets here in the U.S. but makes them in Mexico. Their top-line is not directly affected by a stronger dollar, but a large portion of their costs, which are paid in pesos, are now cheaper.
Additionally, overseas firms who export to the United States could see an uptick in demand as their goods are now "on sale" relative to their U.S. competitors. The German and Japanese automakers are a good example. Of course, Americans investing in these foreign companies would have this benefit offset as the stronger dollar also decreases the value of their investment.
So what are some specific stocks for U.S. investors to play the dollar rally?
Here are 3 names:
American Eagle Outfitters (NYSE:AEO)
American Eagle Outfitters is an apparel and accessories retailer with 1,056 stores under the American Eagle Outfitters and aerie brands. Over 87% of these stores are located in the United States, so the vast majority of its revenue is denominated in U.S. dollars. However, the company substantially purchases all of its merchandise from non-American suppliers and manufacturers, and it currently does not hedge its foreign currency risks.
Tile Shop Holdings (NASDAQ:TTS)
The Tile Shop sells a wide variety of stone tiles, setting and maintenance materials, and related accessories through its 107 stores in 31 states. All of its revenues come from the U.S. However, the company sources its products from approximately 130 vendors from around the globe, with 90% coming from outside of the United States (52% from, 36% from Europe, and 2% from South America).
Standard Motor Products (NYSE:SMP)
Standard Motor Products manufactures and distributes replacement parts for motor vehicles in the automotive aftermarket industry. The company sell its products primarily to large U.S. retail chains like O'Reilly Automotive, NAPA Auto Parts, Advance Auto Parts, and AutoZone (NYSE:AZO). Nearly 90% of Standard Motor's revenue comes from the United States. However, it manufactures its products around the globe, with facilities in Canada, Poland and Mexico. And it wants to increase its manufacturing footprint in low-cost regions.
The Bottom Line
The strong dollar has been a headwind for the overall stock market. However, not all companies are hurt by a rising greenback. And these three companies are well-positioned to benefit from it.