A stronger dollar is making life a lot tougher for the blue chips, but there are plenty of other things to worry about as well. The Dow Jones Industrial Average took a tumble after nearly a quarter of the Dow stocks posted disappointing results or outlooks in the period between Monday’s close and Tuesday’s open. In almost every case, a stronger dollar took at least some of the blame — but not all.
There’s no doubt the rising dollar is making life miserable for Dow stocks. The euro, yen, ruble — you name it — are all sinking against the greenback. That makes U.S. goods more expensive overseas, and therefore less competitive. Just as bad, overseas sales become worth less when converted into dollars.
These pressures aren’t going away anytime soon. The U.S. economy — and its equity and bond markets — are pretty much the only game in town. U.S. stocks are in a bull market, while U.S. interest rates offer a fountain of income compared to, say, Germany or Japan. That creates demand for dollars.
At the same time, central bankers from Japan to Europe are determined to quash deflation, and that means further weakness for their currencies vs. the dollar.
The DJIA is very much a multinational index, and that means currency headwinds are going to remain a headache through 2015 and probably beyond. True, some Dow stocks will be able to shrug it off, but other blue chips just can’t afford the hit to operations. These are the Dow stocks that should be written off. Between the strong dollar and some other critical issues, it’s time to sell these blue chips before things get worse.
Dow Stocks to Sell Now: Caterpillar Inc. (CAT)
Caterpillar Inc. (NYSE:CAT) cratered Tuesday after posting a 25% drop in quarterly profit and forecast another 22% decline in earnings per share for 2015. The world’s largest maker of mining and construction equipment is in the midst of a multi-year nightmare from which it cannot wake up.
CAT famously made an $8-billion-bet on mining with its acquisition of Bucyrus a few years back — and the timing could not have been worse. It was a bet on Chinese economic growth and rising commodities prices. The former has slowed markedly while the latter has gone into a tailspin.
But it gets worse: CAT blamed the warnings on slower-than-expected growth in China, lower prices for iron ore, coal and copper, and the strong dollar. That’s old news. But now tumbling oil prices are a headwind too. This company can’t catch a break. CAT just waved the white flag on 2015, and so should holders of CAT stock.
Dow Stocks to Sell Now: United Technologies Corporation (UTX)
Okay, so the only reason United Technologies Corporation (NYSE:UTX) slashed its 2015 earnings outlook was because of the stronger dollar, but this multinational has some other major problems.
UTX is spending a fortune through 2020 to develop and manufacture its latest Pratt & Whitney jet engine. This is happening at exactly the same time as sales are getting pinched by the dollar. That dynamic completely changes the return UTX can expect on the project. Indeed, UTX said the Pratt & Whitney division won’t have any profits this year because of the dollar.
UTX has committed $1.7 billion in capital investments for 2015. That kind of capex magnifies the effects of the stronger dollar, and puts the remainder of the year very much in doubt. UTX stock has gained a meager 3% over the last 52 weeks and it won’t be able to break that pattern until the macro picture improves.
Dow Stocks to Sell: Procter & Gamble Co (PG)
Few Dow stocks are getting slammed by the stronger dollar as much as Procter & Gamble Co (NYSE:PG). Indeed, the consumer products company generates fully two-thirds of its revenue from foreign markets.
PG slashed its revenue outlook for the year on currency woes. Sales are expected to fall 3% to 4%, as virtually every currency in the world is tumbling against the dollar. The most recent quarter was ugly too, as PG missed Wall Street estimates as gross margin retreated, volume was flat and sales fell in every division.
Adding to the pain is the fact that sales and volume in the beauty business continues to decline. Beauty has higher margins and is supposed to have higher growth prospects, which is critical to PG’s strategy. PG is in the midst of selling off 100 brands to concentrate on the winners — like beauty. Beauty sales really need to pull their weight as PG gives up revenue from all those former brands.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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