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The earnings season is confirming our suspicions that the strong dollar is putting the hurt on certain multinationals. The best-looking stocks, given the currency headwinds, could be small-cap domestic stocks.
Even though we knew that a strong dollar could have a negative impact on the multinationals, the market is still reacting poorly. That means companies generating a large portion of their revenues overseas could be in for a tough 2015.
The dollar has been on a tear over the last year. The U.S. Dollar Index is at multi-year highs, extending a three-year dollar bull market.
Meanwhile, the U.S. economy remains much stronger than the rest of the world. Foreign investors are flocking to the U.S. markets in hopes of taking refuge. At the same time, countries in Europe are easing and depreciating their currencies in hopes of spurring economic growth.
But the strong dollar isn’t all that great for certain companies, especially major multinationals. Procter & Gamble (NYSE: PG) and Kimberly Clark Corp. (NYSE: KMB), for example, are both down over 5% year to date. This comes as the two companies released bleak earnings reports last week — with currency headwinds to blame.
P&G noted that the currency impact (read: strong dollar) to earnings for the fiscal year was the largest ever. And Kimberly Clark said that currency headwinds will hurt its earnings by more than 15% in 2015.
Other companies blaming the strong dollar for weak earnings included DuPont (NYSE: DD), Microsoft (NASDAQ: MSFT) and Caterpillar (NYSE: CAT). Assuming the dollar remains strong in 2015, these companies and others will continue to see their earnings pressured. This includes Priceline Group (NASDAQ: PCLN) and HomeAway (NASDAQ: AWAY); both companies have large exposure to the euro.
But why put up with stock price volatility? That’s especially the question, considering that the dollar may well remain strong throughout 2015 — meaning more pain for companies operating internationally.
The regional banks and domestic retailers are obvious choices for investors looking to take the currency risk out of their portfolio. We highlighted Ross Stores (NASDAQ: ROST) and Capital One (NYSE: COF) when we encouraged readers to invest in U.S.-focused companies.
Going beyond that, it also pays to look in the small-cap space. Most small-cap stocks only operate within the U.S. Here are a few choice options that give investors exposure to a variety of industries.
Strategic Hotels & Resorts (NYSE: BEE) is a real estate investment trust (REIT) that focuses on luxury hotels in the U.S. It owns high-quality assets in San Francisco, New York City and Washington D.C.
It suspended its dividend back in 2008 when the financial crisis hit and has been working on making key acquisitions and strengthening its balance sheet since then. It has plans to reinstate its dividend this year.
G-III Apparel Group (NASDAQ: GIII) is a maker of outerwear and sportswear. It generates 89% of its revenues from the U.S. With no long-term debt and trading at a price-to-earnings ratio of 19 (based on next year’s earnings estimates), G-III is attractive. That’s especially true when you consider the fact that earnings are expected grow to grow by 33% this year.
Graphic Packaging Holding (NYSE: GPK) is a paperboard packaging company. It operates in a steady industry, where the demand for packaging products for food and beverages is somewhat recession-proof. Graphic Packaging generates around 88% of its revenues from the U.S. and Canada.
Vail Resorts (NYSE: MTN) is the ski resort and lodge owner/operator, operating in Western U.S. states like Colorado and Utah. It offers a 1.9% dividend yield. Essentially, Vail is a solid business with a strong economic moat: The amount of land that’s ideal for a ski resort is finite and it faces a raft of government regulations.
Another angle for investors is to capitalize on the fact that everyone has to eat. With more money in consumers’ pockets thanks to low energy costs and higher employment, perhaps some casual dining stocks are worth considering.
A couple interesting picks in this space are DineEquity (NYSE: DIN) and Buffalo Wild Wings (NASDAQ: BWLD). DineEquity is the steady dividend-paying play, and Buffalo Wild Wings is the growth story.
DineEquity offers a robust 3.3% dividend yield. Operating the Applebee’s and IHOP chains, shares of DineEquity are up 370% over the last five years — over 4x the return of the S&P 500 over that period.
Buffalo Wild Wings’stock is up nearly 1,500% since its 2003 IPO (compared to the S&P 500, which is up 95% since then), but there still appears to be plenty of growth ahead. Earnings are expected to grow by around 20% this year and next, which is tops in the restaurant industry.
Who says you need international exposure to be diversified? The U.S. is perhaps the best-positioned economy on the global stage. It is time to consider the well-performing domestic companies that investors can buy for upside while reducing currency risk.
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