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Dollar Strengthens on Turkey's Trouble: Top 5 Gainers

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The U.S. dollar currently strengthened to its firmest level against major rivals on concerns about the health of Turkey’s financial system. U.S. sanctions against top Turkish government officials and the country’s unorthodox economic policies have spooked investors.

So, how do you play a strong dollar? Small caps, being U.S.-centric, are better poised to weather a stronger U.S. dollar. This category of stocks is ripping to fresh records as they are cushioned against the loss of competitiveness and currency translation impact of a stronger greenback. Needless to say that as dollar rises; multi-nationals lose their competitive advantage as foreign customers see U.S. goods as more expensive than non-U.S. goods.

Dollar Hits One-Year High, Lira in Trouble

The Turkish lira recently lost more than 10% against the U.S. dollar, which hit a one-year high as worries about Turkey’s capacity to repay foreign-currency debts rattled the global equity markets.

The European Central Bank (ECB) has raised concerns about the country’s economic stability, whose leader happens to be President Recep Tayyip Erdogan. He was re-elected in a snap vote in June and his growing power raised a lot of doubt over the independence of the country’s central bank.

The lira has been consistently near an all-time low against the U.S. dollar throughout this summer. According to Dow Jones Market Data, one dollar recently brought 5.8595 Turkish liras, compared with 5.5426 on late-Thursday in New York. FactSet data showed that lira is down 13.3% for the week and has tanked more than 35% so far this year.

Euro Takes a Beating

The euro, most significant component of the dollar, plunged against the greenback, emphasizing the spillover effect of Turkey’s crisis on European markets. The euro tumbled 0.8% to $1.445, its weakest since July 2017.

Sean Callow, currency strategist at Westpac, said that “for some days, global markets have noted the Turkish lira’s plunge with more curiosity than concern, seemingly viewing it as Turkey’s problem and no one else’s but that seems to have changed.”

The euro’s weakness was primarily due to a Financial Times report that the ECB is probing into the Turkish exposure of several European banks because of the sinking lira.

Turkey on the Economic Brink

Rising tensions with the United States and Erdogan’s unwillingness to raise interest rates are taking a toll on its economy. Turkey has threatened to retaliate if the White House levies sanctionson senior Turkish government officials for their role in the detention of an American pastor. Meanwhile, Turkey sent its officials to Washington, but, there is no progress.

Investors are also apprehensive about rise in inflation and the ability of the country’s central bank to do anything about it. After all, the central bank’s independence is already being questioned by investors.

Turkey’s economy, by the way, has expanded rapidly this year mostly due to investments made by foreign investors. But, now investors are anxious about the country’s ability to bring in money during tough times and pay off debts.

What Does a Stronger Dollar Mean for Stocks?

A rising dollar impedes earnings growth, which suggests that returns from the equity market might be subdued. Particularly, companies that derive a lion’s share of their earnings from overseas will be dealt the biggest blow. Such companies are exposed to foreign exchange risks between the United States and other countries they are operating in. Thus, if dollar gains strength, it tends to dent foreign sales of such companies.

S&P Global added that with every 1% rise in the greenback, large-cap companies with heavier U.S. concentration in terms of revenue generation have gained 71 basis points on average. For small caps, the correlation was way better. In fact, small caps have outperformed large caps so far this year.

The tax cuts enacted this year along with deregulation should further benefit small caps, helping their profits accelerate in the near term. One of the popular measures of small caps, the Russell 200 Index, has risen 9.1% on a year-to-date basis, while the broader S&P 500 has gained 5.9%.

5 Winning Stocks

Small caps are set to benefit from wider domestic revenue exposure which insulates them from the effects of a stronger dollar. Thus, investing in stocks with high domestic exposure in terms of revenue generation seems judicious. We have picked five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

American River Bankshares (AMRB - Free Report) operates as the holding company for American River Bank that provides commercial banking products and services to small and middle-market businesses, and individuals in California, the United States. Currently, the company has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 1.1% in the same period. The company’s expected earnings growth rates for the current quarter and year are 35.3% and 22.7%, respectively.

BG Staffing, Inc. (BGSF - Free Report) provides temporary staffing services in the United States. Currently, the company has a Zacks Rank #1. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 23.5% in the same period. The stock’s expected earnings growth rates for the current quarter and year are 17.1% and 61.4%, respectively.

Evolution Petroleum Corporation (EPM - Free Report) engages in the acquisition, exploitation, and development of properties for the production of crude oil and natural gas, onshore in the United States. Currently, the company has a Zacks Rank #2. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 7.1% in the same period. The company’s expected earnings growth rates for the current quarter and year are 160% and 80%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kamada Ltd. (KMDA - Free Report) develops, produces, and markets specialty plasma-derived protein therapeutics. Currently, the company has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 3.7% in the same period. The stock’s expected earnings growth rate for the current year is 47.4%.

Farmers & Merchants Bancorp, Inc.(FMAO - Free Report) operates as the bank holding company for The Farmers & Merchants State Bank that provides commercial banking, retail banking, and other financial products and services to individuals and small businesses in Northwest Ohio and Northeast Indiana. Currently, the company has a Zacks Rank #2. In the last 60 days, 10 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 3.1% in the same period. The company’s expected earnings growth rates for the current quarter and year are 14.3% and 19.6%, respectively.

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