You Can Beat a Lackluster Buck

Investing in exporters taps growing global demand and turns foreign exchange rates to your advantage

A weak greenback can fan inflation by raising the cost of the necessities of daily life. It also can curb your pleasures by making an overseas vacation ridiculously expensive. But as an investor, you can even the score by buying the stocks of U.S. exporters and multinationals. The sagging dollar makes those companies' products cheaper to foreign buyers paying in their appreciated currencies, and it shows up in companies' profits.

The dollar has declined sharply in the past five years—29% against the euro, 20% against a basket of trade-weighted currencies. Will it continue to weaken in the coming year? More important, is the benefit from the enfeebled dollar already baked into the stock prices of exporters and multinationals? That's anybody's guess. But investing in the stocks of exporters and multinationals is still a smart play, given the weakness in housing and anything connected with it in the domestic economy. "Even if the dollar weren't falling," says Ian Shepherdson, chief U.S. economist at High Frequency Economics, an economic research firm in Valhalla, N.Y., "I would be looking for companies with an international focus—and that's just to get away from the consumer slowdown."

Not all U.S. companies with a global focus benefit from the weak dollar. Some hedge currencies to avoid the gyrations of the foreign exchange market. Others manufacture many of their products abroad, so their costs are in euros or sterling or renminbi.

Investors who want to exploit the weak dollar should check out mutual funds that aim to do just that. Fidelity Export & Multinational Fund (FEXPX)has a year-to-date return through Dec. 14 of 13.5%, vs. a 3.5% return by the Standard & Poor's 500-stock index. And those holding the fund for the past five years have enjoyed an even better return: a 15.3% average annually, vs. 11.6% for the S&P 500.

Victor Thay, who has managed the Fidelity fund since October, 2005, emphasizes that his investments are not based on currency forecasts. Instead, he takes a bottoms-up view of exporters and multinationals, focusing on operating cash flow and reinvestment rates. Thay seeks companies where earnings per share or free-cash flow can double over a seven-year period of time.

Fidelity's Export & Multinational Fund is weighted heavily toward technology stocks, followed by financials and energy. "With a lot of technology companies, nearly a majority if not the majority of their revenues are coming from overseas," says Thay. Indeed, one measure that stands out in the fund's portfolio is the high proportion of company revenues coming from non-U.S. sources. Computer and printer giant Hewlett-Packard (HPQ), one of the fund's top holdings, earns roughly 65% of its sales outside the U.S. For Monsanto (MON), the agricultural and chemical giant, the figure is 43.4%.

GAINS IN HEALTH CARE

Big-cap technology giants aren't the only companies benefiting from a weaker dollar. NCR (NCR), a midsize technology services company in Dayton, saw its revenues rise 12% in the third quarter. One-fourth of that gain came from a favorable currency tailwind. NCR is a leader in automatic teller machines. That segment of its business jumped 17% year-over-year because of strong demand in the Asia-Pacific market as well as in Europe, the Middle East, and Africa.

Health-care companies, too, get a boost from the weaker dollar and strong overseas demand. International revenues at $6.4 billion Becton Dickinson (BDX), a core holding of Fidelity Export & Multinational, came to 52.3% in 2007. That was an increase of 11% from a year earlier, reflecting a 5% favorable impact from translating revenues in strong foreign currencies into weaker dollars. For Allergan ( 2 Next Page

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