How to Profit from a Falling Dollar
by Todd BuntonOctober 21, 2010 | Comments : 0 Recommended this article: (0)
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Things have not been good for the greenback lately.
The dollar has tanked as it has become increasingly likely that the Federal Reserve will initiate another round of quantitative easing soon.
Of course, back in late 2008 and early 2009, when investors around the globe were afraid the sky might be falling, they flocked to the relative safety of the U.S. dollar. When fears about Europe's sovereign debt levels gripped the markets, investors again piled into America's currency.
As the global economic recovery has gained traction, however, investors have fled the dollar in droves in search of riskier assets The stock market has rallied as a result.
Since early June, the dollar is down 13% against a basket of 6 major currencies.
The dollar also recently hit a 15-year low against the Japanese Yen.
More Trouble Ahead
Looking ahead, the greenback has a lot working against it.
- Enormous Budget Deficits
- Massive Trade Deficits
- World Reserve Status in Jeopardy
The U.S. ran a $1.3 trillion deficit in 2010 after a record $1.4 trillion in 2009. With government debt (essentially the accumulation of all the deficits) approaching $14 trillion, its becoming increasingly likely that the U.S. will not be able to simply grow its way out of the massive fiscal hole. Though Washington will never admit it, they may try to inflate its way out of debt. This is a controversial method that historically has turned otherwise stable nations into banana republics. Either way, it doesn't bode well for the dollar.
Inflation is virtually non-existent at the moment, but the Federal Reserve is willing to take extraordinary measures to change that. Another round of quantitative easing seems almost certain when the central bank meets again in November. What that means is that the Fed will essentially print money out of thin air, thereby increasing the money supply. And everyone knows that when there is more of something, it becomes less valuable.
The U.S. trade deficit widened to $46 billion in August, a 49% increase from the same month in 2009. This included a record deficit with China that totaled $28 billion. As foreigners ship goods into the U.S., the U.S. sends its currency overseas. This means that more dollars are held abroad, which can be sold at any time, driving the dollar down.
This topic hasn't grabbed headlines as much recently, but it remains a threat nonetheless. Back in 2009 China called for the creation of a new currency to replace the greenback as the world's standard. This process will not happen overnight, however, and the U.S. currency would still be a major player. Overall, though, the demand for dollars would decline.
All of these scenarios paint a grim picture for the dollar.
Where to Invest
How can you profit from this trend? One choice would be to buy gold, commodities, or simply purchase currencies such as the Japanese Yen, Australian Dollar, or British Pound directly (I'd steer clear of the Euro for now).
There are other ways to profit from a weak dollar, however.
One way would be to buy shares of companies that do a large portion of business overseas. Companies that earn lots of profit overseas will repatriate those earnings back to dollars and naturally see a boost as the dollar weakens. It's also a less risky bet, since these stocks have solid underlying businesses that should do well even if the dollar reverses course.
Here's a list of stocks that will do well at the dollar's expense.
Aflac (AFL) and its famous white duck are even more popular in Japan than the United States. Nearly 75% of the insurance company's business comes from the Land of the Rising Sun.
Despite the Bank of Japan's best efforts, the Yen continues to strengthen against the dollar. Management has outlined different EPS scenarios given the Yen/Dollar exchange rate, and a stronger Yen will have a significant positive impact on EPS.
Analysts have been revising their estimates higher as a result, propelling the stock to a Zacks #1 Rank (Strong Buy).
Valuation looks attractive as shares are trading at just 10x forward earnings. The company also recently announced its 28th consecutive year of a dividend increase. The stock yields 2.0%.
Expeditors International (EXPD) provides global logistics solutions to customers around the globe. The company recognizes 78% of sales from outside the U.S.
The company delivered a solid second quarter in which it beat the Zacks Consensus Estimate by 8% on strong airfreight and ocean shipping demand.
Shares have had a strong run up in the last several weeks as fears of a double-dip recession subside. Valuation is a little pricey, however. EXPD currently trades at 32x forward earnings compared to the industry average of 19x.
Expeditors International carries no long-term debt and has superior return on equity however. The company also plans to expand its presence internationally. It is a Zacks #2 Rank (Buy) stock.
Pall Corp (PLL) is the world's largest maker of filtration, separation, and purification products. The company recognizes over two-thirds of its revenue from overseas.
The company recently reported fourth quarter earnings per share of $0.72, beating the Zacks Consensus Estimate by 13%. Earnings were up 26% year-over-year. Analysts have revised their 2011 and 2012 estimates higher as a result.
Valuation is reasonable with shares trading at 17.6x forward earnings, a discount to the industry average of 18.9x. It is a Zacks #2 Rank (Buy) stock.
Caterpillar (CAT) recently delivered a strong third quarter, reporting earnings per share of $1.22, compared to the Zacks Consensus Estimate of $1.09. Earnings per share almost doubled from the same quarter in 2009.
The company, headquartered in Peoria, Ill., recognized over 60% of sales from outside of North America. Growth was strong around the globe, particularly in the emerging markets.
Management raised guidance for the rest of 2010 to $3.80 to $4.00 per share, up from previous guidance of $3.15 to $3.85. Shares currently trade at 21.5x forward earnings, a slight premium to the industry average of 18.1x.
It is a Zacks #1 Rank (Strong Buy) stock.
Disclosure: The author owns shares of Aflac (AFL).
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