Stock Watch


Invest in Companies Focused on U.S. Customers

Anne Kates Smith

Companies heavy on U.S. sales trump multinationals for now.



Multinational companies—those with businesses and customers in several countries—have an edge in a global economy. At least they did until the global slowdown. Over the summer, investors in multinationals got hit with a double whammy. Overseas demand slowed dramatically. At the same time, the deepening euro crisis precipitated a worldwide flight to safety, pushing up the U.S. dollar. For U.S.-based companies, that meant foreign sales now translated into reduced revenues and profits.

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Cummins, a truck-engine maker based in Indiana, has scaled back projected sales for 2012, in part because of weak emerging-market demand. Titans such as Johnson & Johnson, McDonald’s, PepsiCo, Philip Morris International and Procter & Gamble have dialed back expectations for sales and earnings this year, citing weak overseas demand and currency headwinds.

Bargain hunters argue that any hiccup in these sorts of companies gives investors a chance to buy shares of world-class blue chips on the cheap. Plus, a diversified portfolio demands exposure to foreign markets. But the recent stumble in multinationals raises the question: Is it time to buy American?

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Could be. As domestic profits for non-financial U.S. companies rose to a record high in the second quarter—up 7% from the same period in 2011—profits from abroad dipped 3.2%. Currency translations will remain a challenge for multinationals. Although weakening recently, the dollar, relative to a basket of currencies, has gained 6% over the past 12 months (prices and results are through September 7). “Currency markets can trend for years,” says Marc Chandler, a foreign-exchange analyst at Brown Brothers Harriman. “We’re four years into this uptrend. I suspect we’re halfway through.”

True, the U.S. economy isn’t exactly robust, with recent indicators pointing to waning growth. But economies in Europe, Brazil, Japan and China are slowing more. “The global economy is deteriorating, led by things happening outside the U.S.,” says S&P Capital IQ strategist Alec Young. “The U.S. is the whitest shirt in the closet.”

The “buy American” theme has already paid off. Stocks in the Russell 1000 index with all-domestic revenues are up 14% so far this year, says Bespoke Investment Group, compared with 8% for internationally oriented counterparts.

Plenty of homegrown stocks are worth a look now. Paychex (symbol PAYX, $34) derives nearly all of its sales stateside, providing payroll, benefits and human resources services for small and midsize businesses. The company has weathered a lackluster employment market, and it has $790 million in cash and no debt. The stock produces a 3.8% dividend yield. Target (TGT, $64) reaps 100% of its sales in the U.S., although the big-box retailer plans to expand into Canada. Remodeled stores that offer fresh food are driving more frequent visits, while the chain’s growing REDcard loyalty program boosts customer spending. Express Scripts (ESRX, $63) is a pharmacy-benefits manager for employers, unions, insurers and government, with 99% of sales in the U.S. An aging population and an emphasis on cost containment bode well for the company.

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