As investors gear up for a rate hike, the greenback scaled to its highest in 13 years. Fed Chairwoman Janet Yellen’s hints of a rate hike “relatively soon”, thanks to the strong economic data of October, have supported the rally. Investors also believe that President-elect Donald Trump will drive economic growth with his fiscal spending and tax-cut initiatives.
The dollar’s gain against major world currencies has been bad news for U.S. companies with large overseas operations. But, it’s a different story for companies that generate a bulk of their revenues from within the U.S. Such companies don’t have to fret about their products becoming too expensive for non-U.S. buyers or about foreign exchange risks when repatriating overseas profits. So, scoop up such stocks for lofty gains.
Dollar Extends Rally to 10th session
The ICE U.S. Dollar index, which measures the U.S. currency against a basket of six currencies, extended its winning streak for the 10th straight session on Nov 18, touching 101.52, the highest since Apr 2013. Over the past 10 trading sessions, the index gained 4.6%. Over the same time frame, the dollar has also reversed its losses against the euro and yen.
Against the dollar, the euro was $1.0591 as of Nov 18. The euro hasn’t traded below the $1.06 mark in almost year and a half. When it comes to the yen, the dollar crossed the ¥110 mark for the first time in six months. The U.S. currency had hit ¥110.93, the highest since May 31. It then held most of its gains to change hands at ¥110.88 late on Nov 18 in New York. For the week, the dollar gained 2.5% against the euro and 4% versus the yen.
Rate Hike Relatively Soon: Yellen
Hints of a imminent rate hike have helped the dollar bounce back from a month-long slump. Federal Reserve policymakers including James Bullard, Robert Kaplan and Esther George are are also extending support toward an interest rate hike in as early as December.
The economy is showing signs of strength, with housing starts surging to a nine-year high last month as builders ramped up construction of both single and multi-family homes (read more: 5 Top Construction Picks as Housing Starts Hit 9-Year High).
The unemployment rate, in the meantime, declined 0.1 percentage point last month to 4.9%, while weekly jobless claims, a proxy for layoffs, dropped 19,000 to a seasonally adjusted 235,000 in the week ended Nov 12, the lowest since 1973. The U.S. consumer prices, on the other hand, recorded their biggest increase in six months in October on rising gasoline costs and rents. The Consumer Price Index increased 0.4% last month after the 0.3% hike in the prior month.
Dollar Finds New Life Under Trump
Investors currently view Trump’s administration as pro-growth. His policies to boost fiscal spending, trim taxes and loosen regulations are expected to bolster economic growth, which will eventually compel the Fed to step up the pace of short-term interest rate hikes.
Trump’s infrastructure proposals quote National Association of Manufacturers data which estimate that a “ten year funding gap” of nearly $1 trillion exists. The President elect plans to spend this amount on infrastructure (read more: 4 Stocks to Gain From Trump's Infrastructure Push).
One of the pillars of Trump’s campaign was a promise to cut U.S. corporate tax rates from 35% to 15%. Such a move is projected to radically increase the attractiveness of the U.S. as a business destination. Corporates will also get a chance to repatriate foreign profits at a rate of 10%. The lower tax burden is expected to boost profits for large biotech companies. This extra cash can be utilized for buying back stocks, boosting earnings, paying dividends or investing in drug research (read more: 5 Top Biotech Stocks to Buy on Trump Victory).
Trump, in the meantime, views the Dodd-Frank regulatory overhaul as a harsh measure, especially, on smaller banks. Trump has called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility (read more: 5 Stocks to Buy as Trump Raises Hopes for Banking Sector).
5 Stocks to Benefit from a Stronger Dollar
With the possibility of a rate hike firming in the near term, the dollar is expected to continue its rally. Higher interest rates tend to attract foreign investments, thereby,increasing the demand for and value of the home country’s currency.
The rising dollar will deny revenues of multinational companies that rely heavily on profits from overseas. In such a scenario, investors should focus on companies that derive more of their profits and revenues in the U.S. We have, thus, selected five companies poised to profit from the strengthening of the dollar.
These companies boast a VGM score of ‘A’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
SkyWest Inc. (SKYW - Free Report) , through its subsidiaries, operates a regional airline in the U.S. The company has a Zacks Rank #1. SkyWest’sexpected growth rate for the current quarter and year are 4.1% and 36.2%, respectively. The Zacks Consensus Estimate for its current year earnings increased 1.9% over the last 60 days.
Willdan Group, Inc. (WLDN - Free Report) provides professional, technical and consulting services to utilities, private industry, and public agencies in the U.S. The company’s expected growth rate for the current quarter and year are 220% and 82.7%, respectively. The Zacks Consensus Estimate for its current year earnings rose 11.8% in the last 60 days. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zumiez, Inc. (ZUMZ - Free Report) operates as a specialty retailer of apparel, footwear, accessories, and hardgoods for young men and women. As of Aug 27, 2016, the company operated 674 stores, including 605 in the U.S. Zumiez has a Zacks Rank #2. The company’s expected growth rate for the next quarter and year are 22.85% and 23.8%, respectively. The Zacks Consensus Estimate for its current year earnings increased 23.6% over the last 60 days.
Sanderson Farms, Inc. (SAFM - Free Report) is an integrated poultry processing company that produces and markets fresh, frozen, and prepared chicken products in the U.S. The company has a Zacks Rank #1. Sanderson Farms’ expected growth rate for the current and next quarter are 119.67% and 189.36%, respectively. The Zacks Consensus Estimate for its current year earnings rose 6.3% in the last 60 days.
Nutrisystem, Inc. (NTRI - Free Report) provides weight management products and services for women and men in the U.S. The company’s expected growth rate for the current quarter and year are 28.07% and 33.70%, respectively. The Zacks Consensus Estimate for its current year earnings increased 2.4% in the last 60 days. The stock has a Zacks Rank #2.
Confidential: Zacks' Best Investment Ideas
Would you like to see a hand-picked ""all-star"" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>