Tumbling Dollar, Climbing Stocks

The weak buck is boosting results at many companies, but not all are good buys right now. Here are some picks -- and some caveats

By Eric Wahlgren

If you're an American traveling in Europe, each drop in the greenback -- which briefly fell to yet another record low against the euro in mid-February -- is a real bummer. Up goes the cost of your gondola ride in Venice and your suite at Paris' Plaza Athenee, where Sex in the City heroine Carrie Bradshaw shacked up with her Russian lover before dumping him in the series finale. But before you go cursing America's shrunken national currency, realize that as a stock investor, the dollar's nasty slide can have some benefits.

A devalued buck is a boon for U.S. companies that export or derive a big chunk of revenues overseas, says Sanjay Ayer, an equity analyst at Morningstar, the mutual-fund research company in Chicago. "A weak dollar makes goods produced in the U.S. more affordable, making the companies more competitive," he says. What's more, Ayer points out that these exporters can capitalize on the translation effect: Sales rung up in euros or some other foreign currency swell when converted back into declining dollars.

OVERSEAS DEMAND.

  Naturally, a sales boost that arises this way "doesn't necessarily mean a company's stock price is going to go up," points out Michael Kaye, portfolio services analyst for Standard & Poor's. After all, many factors influence stock prices, including to what extent a company manages to turn greater revenues into bigger profits. Still, "you would think these companies' stocks would benefit," Kaye says.

Although it's likely that the biggest downward move in the dollar has already occurred -- it has fallen about 30% against the euro since the single currency was introduced two years ago -- pros believe the greenback may be squeezed still further. The U.S. trade and budget deficits continue to grow. And the humbled U.S. currency may make it less appealing for foreign investors to hold dollar-denominated assets like Treasury bonds, putting further pressure on the dollar, Kaye says.

However, continuing dollar downside could mean more upside for a select group of stocks, Kaye adds. He has identified 11 such companies -- all of which get more than 50% of their sales from abroad. To ensure the outfits he picked have the best chance of proving worthy investments, he chose only those carrying S&P's highest rating, 5 STARS, or buy. According to S&P, 5-STARS stocks are expected to greatly outperform the benchmark S&P 500-stock index in the next 6 to 12 months. (Kaye doesn't have any ties to the companies he mentions, although other divisions of S&P may.)

CHIPS AND BATTERIES.

  Of this bunch, a majority are tech outfits, including Norwood (Mass.)-based Analog Devices (ADI ), which makes microchips used in cell phones and other electronics; Intel (INTC ), the world's largest chipmaker; IBM (IBM ); memory-chip maker Micron Technologies (MU ); San Diego-based wireless-chip company Qualcomm (QCOM ); Rayovac (ROV ), which manufactures batteries and flashlights; and Xilinx (XLNX ), a San Jose (Calif.) that makes programmable microchips for electronic products. Kaye also puts Washington (D.C.)-based Harman International (HAR ), which makes high-end video and audio equipment, on the list (see BW Online, 2/18/04, "What's Driving Harman's Success").

"The demand for technology outside the U.S. has been increasing over the last few years," Kaye explains. "A lot of developing countries are getting up to speed where the U.S. is."

The remaining three on his 11-stock list are energy outfits. "Even though they do a big chunk of business in the U.S., they also do business in a lot of other countries," Kaye says. These companies are Diamond Offshore Drilling (DO ), the Houston-based deep-water driller; Ensco Intl. (ESV ), a Dallas-based drilling-services outfit; and Texas-based oil major ExxonMobil (XOM ).

"TREMENDOUS OPPORTUNITY."

  Pat O'Neil, president of Minneapolis-based Loring Investments, which manages three hedge funds, says although a weak dollar can boost sales temporarily, he's wary of basing an investment strategy on temporary currency fluctuations. After all, the greenback could turn around some day. Still, he thinks scouting for companies that derive a big portion of their sales overseas is smart. Currency fluctuations that augment sales can be icing on the cake.

These days, he's putting money into "companies involved in the worldwide development of electronic commerce." Two companies in particular that he likes are networking-gear maker Cisco Systems (CSCO ) and Symantec (SYMC ), which makes network security software such as Norton AntiVirus. In Symantec's latest third quarter, 54% of revenues came from overseas, a 40% increase over the year-ago quarter. By contrast, U.S. revenues for the Cupertino (Calif.)-based outfit increased 22% over the year-ago quarter. "There's tremendous opportunity to expand as all of the pieces get put in place for international communications and international commerce," O'Neil says.

As far as Morningstar's Ayer is concerned, investors "could be getting on board behind the curve" if they're looking to get into stocks that benefit from the relatively feeble dollar. Two companies that reaped rewards from the trend are St. Paul-based diversified manufacturer 3M (MMM ) and Wilmington (Del.)-based Dupont (DD ), the chemicals giant. 3M, which derives 58% of its sales outside the U.S., last year saw sales rise 5.2 percentage points from the currency effect, for overall growth of 11.6%. For Dupont, which gets 55% of its sales abroad, the currency effect boosted sales 5 percentage points for overall growth of 13%.

SOUND STRATEGY.

  Ayer thinks Dupont is fairly valued since it's trading at 22 times its 2004 earnings growth rate of about 30%, according to earnings tracker First Call/Thomson Financial. And he believes 3M is overvalued, as its 2004 earnings are expected to grow only 14%, while its stock is trading at nearly 23 times earnings. "A lot of the currency effect is now probably priced into many stocks," Ayer concludes. "We would caution you to look at valuation." (Ayer doesn't have any ties to 3M or Dupont, nor does Morningstar.)

A valuation approach, of course, is always a sound strategy when looking to invest. Some globally oriented companies may still post nice gains if the dollar goes lower, but you'll want to make sure you aren't paying too much for the potential upside.

Wahlgren covers financial markets for BusinessWeek Online in New York

Edited by Beth Belton

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