The strong dollar of the past few years has proven to be a problem for many American companies. Harley-Davidson Inc (NYSE:HOG), for instance, has struggled with competition from Yamaha Corp (ADR) (OTCMKTS:YAMCY), as it sells in the strong dollar while Yamaha benefits from the weak yen. On its Q2 conference call last month, Procter & Gamble Co (NYSE:PG) said the strong dollar has cost it a stunning amount: over $4 billion over the past four years, or fully two quarters’ worth of earnings.
But there are companies benefiting from the strong dollar — which might, in turn, suggest stocks to buy. Donald Trump has criticized the strong dollar, but it’s also not clear what the U.S. can do about it at the moment. And many of Trump’s potential policies are expected to be inflationary.
Meanwhile, expected interest rates from the Federal Reserve also could attract more dollar interest, given near-zero interest rates in Europe, in particular.
The strong dollar could continue — or strengthen. Normally, that would suggest buying companies that import goods, such as retailers. But the potential of a “border tax” could offset those benefits — and importers from China (whose currency is loosely tied to the dollar) won’t see much, if any, benefit. What investors should look for are U.S. multinationals with costs outside the U.S., or overseas companies that serve the U.S.
If the strong dollar gets even stronger, here are three securities that would benefit — and (perhaps) three stocks to buy now.
Stocks That Love the Strong Dollar: Alcoa (AA)
Alcoa Corp (NYSE:AA) recently split off from the legacy Alcoa Inc. Alcoa Corp includes the company’s smelting and refining operations; faster-growing Arconic Inc (NYSE:ARNC) took the engineered products business.
AA stock has almost doubled since the split just four months ago. The strong dollar isn’t the direct cause, but it has helped. Currency-boosted Adjusted EBITDA by $7 million in the company’s fourth quarter — a time when dollar strength was relatively muted.
The benefit for Alcoa is that it gets 48% of its revenue from the U.S., and books other sales in dollars and/or dollar-denominated currencies. Yet most of its operations are based overseas. The strong dollar thus helps domestic sales, and lowers operating costs at foreign plants.
Whether the benefits will hold for Alcoa aren’t clear. The dollar does impact pricing for a good chunk of euro- and yen-denominated revenue. And a potential border tax could impact the company. But Alcoa does have U.S. facilities idled, meaning it could respond to tax changes — even if they would negate some of the company’s current strong dollar benefits.
Stocks That Love the Strong Dollar: Sanderson Farms (SAFM)
A strong dollar generally brings down costs of both exported and domestically produced goods. After all, in-country producers have to compete with foreign competition.
In the case of poultry producer Sanderson Farms, Inc. (NASDAQ:SAFM), chicken prices did, in fact, decline during the company’s fiscal 2016 (ending October). But grain prices fell further — in part because of similar dollar strength. That allowed SAFM margins to expand nicely in Q4.
Combined with the end of export bans due to avian influenza concerns, Sanderson Farms posted a very strong quarter. Earnings per share nearly tripled.
Despite potential help from dollar-driven commodity costs, there are concerns. Sanderson, along with other chicken producers such as Tyson Foods, Inc. (NYSE:TSN) and Pilgrim’s Pride Corporation (NASDAQ:PPC), is being investigated for price-fixing.
The so-called “Georgia Dock” scandal could pressure SAFM stock. Short-sellers continue to target SAFM as well: short interest is a staggering 33% of the float.
But if Sanderson Farms can shake off those concerns, 2017 looks bright. Margins should expand, if the dollar cooperates, and overseas sales are less than 10% of SAFM’s total revenue. In other words, the strong dollar only modestly impacts SAFM revenue — but, for now, it’s helping the company’s profits far more.
Stocks That Love the Strong Dollar: WisdomTree Strong Dollar U.S. Equity Fund (USSD)
Of course, investors aren’t forced to pick stocks to benefit from the strong dollar. Exchange-traded funds can be used to bet on the dollar directly – or on stocks that should benefit from a strong dollar.
The WisdomTree Strong Dollar U.S. Equity Fund (NYSEARCA:USSD) seeks to offer the latter option. The ETF holds over 200 different stocks, all of which gain 80% or more of revenue from the U.S. The idea is that excluding international exposure will limit negative currency impacts. Meanwhile, lower input costs should help margins across the board.
The ETF’s top holdings include financials, telecoms and retailers. AT&T Inc. (NYSE:T), Bank of America Corp (NYSE:BAC) and Home Depot Inc (NYSE:HD) all are in the top ten. And the fund seems a smart bet for investors who believe a strong dollar is a sign of — or a result of — a strong economy.
With little international exposure in the fund, it’s more of a pure-play bet not just on the dollar, but the U.S. economy. Assuming both continue to improve, USSD should benefit.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.