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In early 2015, I started pumping strong dollar plays. At the time, it was because the U.S. dollar was at multi-year highs relative to other currencies, and the six-year bull run showed no signs of slowing.
Multinationals like Procter & Gamble (NYSE: PG) were, and still are, seeing currency headwinds, meaning they have to convert their overseas’ earnings into U.S. dollars, ultimately getting less money as the dollar continues to strengthen. But companies that do most of their business within the U.S. have been thriving.
In January I focused on companies that get nearly all their revenue from within the U.S., including CVS Health (NYSE: CVS) and Ross Stores (NASDAQ: ROST), which are up 11% and 24% since then, respectively.
Then in February I looked at some more underrated plays in U.S.-centric stocks, such as G-III Apparel Group (NASDAQ: GIII) and Vail Resorts (NYSE: MTN), which are since up 38% and 25%, respectively.
Chinese Currency Headwinds
Now we’re coming full circle to look at currency plays again, this time with a new headwind to navigate. China has devalued its currency, the yuan, against the U.S. dollar by the most in over a decade. That has signaled to most of the markets that growth might be slowing for one of the world’s largest economies.
This has put some U.S. companies that trade with China at a disadvantage. Yet the U.S. still has one of the strongest economies in the world.
Why even bother trying to predict what a country will do with its currency or the ultimate fallout? Take out the currency risk by sticking to U.S.-focused companies. With all that in mind, here are the top three ways to avoid all the yuan confusion:
No. 1 Strong Dollar Play: Home Depot (NYSE: HD)
Home Depot, the leader in home improvement retail, needs no introduction. It exited China many years ago and is now mainly a U.S.-focused retailer. It has returned nearly a quarter of its market cap to shareholders over the last five years via dividends and buybacks.
Interim tailwinds for Home Depot include the continued recovery in the housing market, but the company is also working on improving its distribution network, which should boost margins through a shift toward a regional distribution network.
Home Depot trades with a similar valuation to top competitor Lowe’s (NYSE: LOW), yet it offers a superior dividend yield, return on capital and expected earnings growth.
No. 2 Strong Dollar Play: Regions Financial (NYSE: RF)
Regions Financial is a southeastern U.S. regional bank operator. Unlike the big banks, or even some larger regional banks, Regions has been focused on core banking – i.e., deposits and loans – which means it should benefit nicely when the Federal Reserve decides to raise interest rates.
Regions is still a turnaround story after being hit hard with losses during the financial crisis. It traded below $4 a share just a few years ago, but despite its effort to clean off bad loans from its books, it’s still cheap. In fact, it’s one of a handful of regional banks trading at less than book value, with a price-to-book ratio of 0.9.
Meanwhile, Regions has made marked improvements with not just its loan book, but also costs, with charge-offs being well under 1% of its loans, versus over 2% from back in 2011. It’s also a decent dividend play, yielding 2.3%.
No. 3 Strong Dollar Play: AT&T (NYSE: T)
AT&T is more of a safe play, given its steady – albeit low-growth – business and hefty 5.5% dividend yield. However, things could be rather interesting at AT&T now that it got the green light to buy DirecTV. This makes it not just a leader in the wireless market, but also in the TV industry.
AT&T is already rolling out wireless and TV bundles to take advantage of its new vast network. Then there’s its push into the faster-growing Latin American markets, where it’s also been active on the acquisition front by buying up two Mexican wireless companies.
In the end, there are companies that do business overseas that are still worth looking at, but for those that would rather not take the currency risk, there are a number of U.S.-focused companies offering great opportunities.
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