We rarely worry about whether the dollar is strong or weak relative to other foreign currencies, unless we have plans to travel abroad and need euros, yen or pesos (although we’re not doing much of that lately). Even so, moves in the dollar can affect your portfolio in surprising ways.
After a decade of nearly uninterrupted gains, the dollar sank precipitously all summer against a basket of foreign currencies. The greenback stabilized in September, however. Overall, since the start of the year, the dollar is lower by only 3%.
But many strategists expect the U.S. currency to fall into a more persistent decline over the medium-to-long term, thanks in part to low interest rates that the Federal Reserve has signaled will stay low for at least three years. “Mounting budget deficits, an expanded Federal Reserve balance sheet and an increased money supply” are weighing on the dollar, too, says Chao Ma, a global strategist at Wells Fargo Investment Institute. “We expect the U.S. dollar to stay in a structural bear market.”
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A weakening dollar can be good for certain investments. U.S. companies that generate a significant chunk of revenues abroad will get a boost from the weaker dollar as money made overseas is converted into greenbacks. When the buck is weaker relative to the euro, for example, the profits that sporting goods giant Nike makes in Europe will translate into more dollars when the firm repatriates those earnings. U.S. firms that export products overseas gain from a weaker dollar, too, because their goods become relatively less expensive for customers overseas.
Below we home in on investments we think will benefit best from a lower dollar. Bear in mind that these are not meant to be wholesale changes you make to your portfolio. Rather, they are small, tactical bets to consider given the outlook for a weaker buck. Returns and data are through October 9.
U.S. multinationals
U.S. companies that have substantial global operations will get a boost from the currency exchange when the dollar is weaker. Sales from foreign countries made up 43% of revenues for companies in the S&P 500 index in 2018, according to the latest data available from S&P Global. The following firms earn a high percentage of their revenues abroad, and they boast strong balance sheets and solid growth prospects, too.
Abbott Laboratories (symbol ABT, $110). Abbott pulls in 64% of sales from overseas. For years now, this maker of medical devices, generic drugs and nutritional drinks has focused on building a presence in emerging markets, where sales are growing fast.
The company’s acquisitions of Alere and St. Jude Medical in 2017 were key to beefing up its global business. Alere gave Abbott a top spot in point-of-care diagnostic tests (the ones administered in your doctor’s office, such as the test for the flu). And with St. Jude Medical, Abbott now dominates the worldwide cardiovascular device market. The purchases helped to drive the company’s overall growth in revenues in recent years, according to Abbott, particularly in emerging markets, which represent 40% of total sales.
Of course, the firm has other pluses. Its continuous glucose monitoring system, Freestyle Libre, is a top choice among diabetes patients—instead of finger sticks, a sensor worn on the body tracks glucose levels constantly. Sales of Freestyle Libre increased 40% in 2019 from the year before; more than 2 million patients worldwide use the device.
Based on analysts’ earnings expectations over the next four quarters, the stock currently trades at a price-earnings multiple of 27—just a little higher than the average multiple of 28 in relation to expected earnings at which the stock has traded over the past three years. The firm’s rapid-result COVID diagnostic test has propelled the shares higher this year. Even so, Credit Suisse analysts Matt Miksic and Vik Chopra expect significant share-price gains over the next 12 months.
Activision Blizzard (ATVI, $78). Just over half of annual revenues at Activision Blizzard come from abroad. In the future, overseas sales may make up even more of total revenues. For starters, the growing shift of gaming to mobile devices (from consoles and computers) has expanded the potential market across the globe, and Activision hopes to pounce on it.
In fact, it already has. In late 2019, Activision launched a mobile-device version of Call of Duty, its hugely successful war game. Since then, the game has tripled its reach, according to the company, topping the charts for installments in more than 150 countries.
Activision’s e-sports leagues are also extending the company’s global reach. This year, Activision started a professional league for Call of Duty that now plays in nine U.S. cities and London, Paris and Toronto. It follows the format of the league for the firm’s game Overwatch, a team-based shooting game set in the future, that plays in multiple cities in China, Korea, Europe and, of course, the U.S.
Activision has racked up bonus points from a boost in gaming during the pandemic-related lockdown. And the November–December release of two next-gen gaming consoles, Microsoft’s Xbox Series X and Sony’s PlayStation 5, may gin up another wave of enthusiasm in the months to come.
Analysts expect 16% average annual earnings growth over the next three years, according to Zacks Investment Research, and shares trade at 27 times expected earnings for the next four quarters—below the typical multiple of 32 for the hobby and games subindustry.
Autodesk (ADSK, $238). The world of computer-aided design software is borderless, which is why 66% of annual sales at Autodesk, the software company best known for its architecture, engineering and construction software, come from outside the U.S. The company translates its software into dozens of languages, including German, French, Russian, Japanese, Korean and Chinese. Research and product-development work is global, too, conducted in the U.S., China, Singapore and the U.K.
The firm’s revenues from recurring software subscriptions—more than 90% of total sales and growing fast—provides a cushion in difficult times. Customers are sticky—once comfortable with a software program, they’re less likely to switch to another. And the potential market is growing. “Autodesk is well positioned to benefit from the ongoing digital transformation of business,” says Goldman Sachs analyst Heather Bellini, who rates the stock a “buy” and predicts annual sales growth of 16% over the next five years.
Earnings are growing even faster. Analysts expect 32% average annual growth in profits over the next three years. Such high-octane growth can be pricey. Shares currently trade at 84 times expected earnings for the next four quarters. Plan to invest for the long term, and either buy on dips or buy shares at regular intervals over time to lower your average cost per share.
Estée Lauder (EL, $225). More than 70% of revenues at skin care and cosmetics company Estée Lauder come from outside the U.S. And business in China, home to 17% of company revenues, is booming. In the quarter that ended in June, sales in China increased 50%—thanks to robust growth in online transactions—compared with the same period the year before. And the company continues to gain share in China’s high-end beauty market, says Stifel analyst Mark Astrachan. He rates the stock a “buy” and expects a 9% climb in annual revenues for the fiscal year that ends in June 2021, along with a 21% jump in earnings.
Founder Estée Lauder started the company 74 years ago. Today, the firm owns two dozen brands, including Aveda, Bobbi Brown, Clinique, Origins and La Mer, and its products are sold in more than 150 countries.
Like the promise it makes to its customers, Estée Lauder (the company) is looking good for its age. In August, it announced a two-year plan to emphasize high-growth areas, including e-commerce, skin-care lines and China sales. The company will shutter 10% to 15% of its physical stores, pare down its distribution network and pull out of department stores with underperforming counters. Astrachan says these moves could yield $300 million to $400 million in savings over the next two years.
LAM Research (LRCX, $363). A surge in demand is coming for memory chips, and that’s good for Lam Research, a leader in the processes critical to making them. The firm makes equipment that chip manufacturers need to produce the increasingly tiny and complex integrated circuits we use in our cell phones and computing devices. Chipmakers are able to engineer wafers—thin chip slices—at a microscopic level using Lam Research’s etching, cleaning and film-depositing systems.
The company’s international edge comes courtesy of the industry it sells to: Most semiconductor chips are made overseas. According to the U.S. International Trade Commission, 84% of all U.S. chip manufacturing equipment sales take place overseas. That’s why Lam Research has multiple sales offices throughout Asia (including China, Japan, Malaysia and Korea) and Europe. The company consistently logs more than 90% of its annual revenues from outside the U.S.
Analysts expect earnings at the company to increase an average of 13% per year over the next three years—roughly in line with its industry—according to Zacks. And the stock trades at 17 times expected earnings for the next four quarters. That’s a discount to the broad U.S. market, which trades at 22 times expected earnings, as well as to the chip-equipment wafer fabrication industry (Lam’s peer group), which trades at an average price-earnings multiple of 28.
Nike (NKE, $131). Nike’s foreign footprint is growing. In its last fiscal year, which ended in May, non-U.S. sales accounted for 61% of revenues at the sporting goods and apparel company, up from 59% and 58% in the previous two years. The firm has e-commerce platforms in 45 countries, and 758 stores (Nike- and Converse-branded shops) outside the U.S. It has offices and subsidiaries in dozens of developed and emerging countries, from Argentina and Australia to the U.K., Uruguay and Vietnam. In other words, Nike is everywhere.
The pandemic took a bite out of sales in the first half of 2020, but the company expects business to rebound by early 2021. Wedbush Securities analysts Christopher Svezia and Paul Nawalany, who recommend the stock, expect a recovery even earlier—before the end of 2020, thanks to brisk sales online and in stores worldwide, as well as a robust wholesale business in China. The company should emerge from the pandemic stronger, they say.
All that muscle will cost you. But even though analysts expect a 49% jump in earnings for the fiscal year that ends next May and a 41% jump the year after, shares currently trade at 43 times projected earnings for the next four quarters. That’s lofty, but not out of line considering the company’s strong earnings profile.
Nvidia (NVDA, $551). Like Lam Research, Nvidia conducts most of its business overseas. The company is best known for its PC-gaming chips, which deliver high-definition graphics. In the fiscal year that ended January 2020, Nvidia raked in 92% of sales from abroad.
The stock is richly priced. Shares have soared in recent months and currently trade at 73 times projected earnings for the next four quarters. That said, analysts expect 20% average annual earnings growth over the next three years, ahead of the 9% three-year earnings growth rate for Nvidia’s peers. What’s more, Nvidia’s latest acquisition may enhance the firm’s profit-growth prospects.
Nvidia announced in September it plans to acquire ARM, a U.K.-based computer chip and software design company. BofA Securities analyst Vivek Arya says the $40 billion deal—the chip industry’s biggest ever—has the potential to “reshape the landscape” of high-performance cloud computing, artificial intelligence, 5G and the Internet of Things, with Nvidia at the center. Arya says the acquisition could boost his long-term earnings estimates by 10% to 15%.
But the deal will require regulatory approval from the U.K., the European Union, the U.S. and China. Arya expects the transaction will face tough scrutiny because of its size, which could put pressure on the stock. Wait for the inevitable dips to buy in.
PayPal Holdings (PYPL, $197). Just under half of PayPal’s revenues are generated outside the U.S. But the company is expanding its foreign operations. In 2019, PayPal bought stakes in Chinese online payment company GoPay and Argentinian e-commerce firm MercadoLibre. In May, it partnered with Gojek, a Southeast Asian online payment firm based in Jakarta.
Business overall is humming. In 2019, the number of active PayPal accounts increased 14% compared with the year before, the number of payment transactions climbed 25%, and the company’s total payment volume—the value of payments made through the platform—increased 23%.
The pandemic has turbocharged growth in e-commerce, and PayPal is in a sweet spot to benefit. Analysts expect average annual earnings growth of 21% over the next three years. Shares are expensive, at 65 times expected earnings for the next four quarters. Look to buy on dips and hold for the long haul.
