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5 Stocks to Buy as Dollar Hits 14-Year High

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Strong manufacturing and housing reports drove the U.S. dollar to a 14-year high and kept all major domestic indices near record highs. The dollar extended its three-month rally, which had followed Donald Trump’s presidential win in November. Trump is expected to stoke growth through fiscal stimulus and deregulation.  

Expectations that Fed would raise rates further this year have supported the rally. Even forecasters including The Goldman Sachs Group, Inc. (GS - Free Report) , Deutsche Bank AG (DB - Free Report) , BNP Paribas SA and Nomura Holdings Inc. predict a stronger dollar against major currencies including euro this year. The dollar’s gain against the major currencies is a boon for companies that generate the bulk of their revenues from the U.S. Such companies don’t have to worry about their products becoming expensive for non-U.S. buyers or foreign exchange risks while repatriating overseas profits. Hence, one should wisely put in their money into such stocks for lofty gains.

Greenback Scales 14-Year High

The dollar soared to a 14-year high on renewed hopes surrounding the health of the world’s largest economy. The greenback inched up 0.5% to $1.0407 per euro as of 3:10 p.m. in New York on Jan 3, after earlier reaching $1.0341, the strongest since Jan 2003.

The ICE dollar index jumped 1% to 103.27 as the greenback rose against most major currencies, while among an extended universe it was strongest against the Mexican peso and South African rand. In fact, the dollar index closed 3.6% higher last year, marking its fourth straight year of gains.

Strong Economic Data Lifts Dollar

The dollar traded firmly higher against its main rivals on upbeat manufacturing and construction spending data. The ISM manufacturing index rose from 53.2% in November to 54.7% in December, its highest in the last two years. The manufacturing index expanded in nine out of the last ten months. It was also higher than the consensus estimate of 53.8%. U.S. construction spending, separately, increased in November to its highest since Apr 2006. The US Census Bureau of the Department of Commerce reported construction spending of $1,182.1 billion in November was up 0.9% from the upwardly revised October estimate of $1,171.4 billion.

Also, the U.S. economy grew at a 0.8% rate in the first quarter of 2016 and 1.4% in the April-thru -June quarter, finally advancing 3.5% in the third quarter.Rebound in the GDP seems to have abated fears of an imminent recession.

Dollar Finds New Life under Trump

Investors also believe that Trump will drive economic growth with his fiscal spending and tax-cut initiatives. 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 many promises made by Trump during his campaign was 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. 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).

Expectations of a Further Rate Hike

The dollar has also gained about 4.6% in the fourth quarter on expectations that the Fed would raise interest rates at a more rapid clip than previously expected. According to the CME Group data, the market is pricing in two rate increases this year. The Fed, however, had projected three rate increases for 2017. Fed Chair Janet Yellen has also said that the labor market has strengthened and wage growth is picking up, underscoring the fact that the central bank will continue to raise interest rates this year.

The Fed had already increased interest rate from a range of 0.25%–0.5% to 0.5%–0.75% in Dec 2016. This marked the first rate hike in 2016 and the second in the last ten years. 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.

5 Stocks to Play a Stronger Dollar

The rising dollar will dent 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’ or ‘B’. 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).

Big 5 Sporting Goods Corporation (BGFV - Free Report) operates as a sporting goods retailer in the western United States. The company has a Zacks Rank #1 and a VGM Score of ‘A’.

The Zacks Consensus Estimate for its current year earnings increased 11.1% over the last 60 days. Over the last three months, Big 5 Sporting Goods’ shares recorded a return of 25.09%, as compared with 1.65% provided by the Zacks categorized Retail-Miscellaneous industry.

Central Garden & Pet Company (CENT - Free Report) produces and markets products for the pet, and lawn and garden supplies industries in the United States. The company has a Zacks Rank #2 and a VGM Score of ‘A’.

The Zacks Consensus Estimate for its current year earnings increased 3.8% over the last 60 days. In the last three months, Central Garden & Pet’s shares recorded a return of 24.82% as compared with 5.99% returned by the Zacks categorized Consumer-Products-Discretionary industry.

Meta Financial Group, Inc. (CASH - Free Report) offers various banking products and services to individuals, small businesses, financial institutions, and other businesses. The company operates a total of 10 full-service branch offices; one non-retail service branch in Memphis, Tennessee; and two agency offices, one in Texas and one in California. The company sports a Zacks Rank #1 and a VGM Score of ‘B’. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for its current year earnings increased 11.8% over the last 60 days. Over the last three months, Meta Financial’s shares recorded a return of 53.97% as compared with 23.01% return provided by the Zacks categorized Financial-Savings and Loan industry.

Argan, Inc. (AGX - Free Report) provides engineering, procurement, construction, commissioning, operations management, maintenance and consulting services in the power generation and renewable energy markets. It serves state and local government agencies, regional communications service providers, electric utilities, other commercial customers, and federal government facilities. The company has a Zacks Rank #1 and a VGM Score of ‘A’.

The Zacks Consensus Estimate for its current year earnings increased 12.3% over the last 60 days. In the last three months, Argan’s shares recorded a return of 20.67% as compared with 4.42% provided by the Zacks categorized Building Products-Miscellaneous industry.

Chegg, Inc. (CHGG - Free Report) operates student-first connected learning platform. The company has a Zacks Rank #2 and a VGM Score of ‘B’.

The Zacks Consensus Estimate for its current year earnings increased 2.6% over the last 60 days. In the last three months, Chegg’s shares recorded a return of 3.22%, as against a negative return of 13.25% provided by the Zacks categorized Internet-Software industry.

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