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Cash In on the Strong Dollar With These 6 Stocks

All of our picks, including two automakers and a pair of retailers, cater to consumers in one way or another.

The dollar has been gaining strength over the past year, and that’s pressuring profits of many U.S. companies that do a substantial amount of business overseas. Consider Coca-Cola (symbol KO, $41.73), which sells its syrup in some 200 nations around the globe and normally brags about its international heft. But CEO John Brock told analysts recently that turning weak foreign currencies back into strong dollars would likely sap 16% from Coke's 2015 earnings.

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But what hurts U.S. companies operating overseas helps foreign firms that sell products here, as well as U.S. companies that buy merchandise from countries with weakening currencies. "Any international company with a high percentage of revenues in the U.S. is in vogue," says Ralph Bassett, deputy head of North American stock investing for Aberdeen Asset Management.

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Over the past year, the U.S. dollar index – a measure of the greenback's strength against a basket of foreign currencies – has gained a whopping 17.5%. That has fueled earnings gains for foreign makers of cars and other consumer goods, as well as U.S. retailers that import many of their wares. Unfortunately, the dollar-given windfall has not been lost on Wall Street, which has been snapping up all the low-hanging fruit. Some opportunities remain, though most involve taking a contrarian leap of faith into out-of-favor companies.

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Knowing that Americans love foreign cars, investors sent shares of a host of overseas automakers zooming. Among them: Bayerische Motoren Werke AG (BAMXY, $41.30), the maker of BMW vehicles; Daimler AG (DDAIY, $95.36), which produces Mercedes-Benz models; Nissan Motor (NSANY, $20.27); and Toyota Motor (TM, $134.16). (All share prices are as of February 18.)

Toyota, the most sensitive to currency swings, saw profits in its October-December quarter soar 27%, largely because it was able to collect a trunkful of yen for every sale made in dollars, says Morningstar analyst David Whiston. But at today’s share prices, the only foreign automaker that looks attractive is Nissan, which Morningstar analysts believe is worth $26. Still, the industry is highly sensitive to economic news, so the slightest whiff of a slowdown in consumer spending could cause the stocks to retreat to more-favorable level. Consider buying the Japanese automakers should their shares drop at least 15%, according to Morningstar.

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Investors with contrarian inclinations will find better deals in domestic automakers, says Whiston. Both Ford Motor (F, $16.21) and General Motors (GM, $37.19) will be hurt by unfavorable currency conversions on their European sales. But because many commodities are priced in dollars, a strong greenback also allows U.S. car manufacturers to buy the steel, copper and aluminum they need to make their vehicles at lower prices. Investors have been so spooked by the potential impact of the dollar's rise on the foreign sales of Ford and GM that they've neglected to consider the positives and have unfairly trashed the stocks. Whiston thinks Ford stock is worth $23 a share and GM's is worth $48.

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The strong dollar has also roiled tobacco stocks. Consider the relative performance of Philip Morris International (PM, $83.00) and Altria Group (MO, $55.24). Philip Morris sells cigarettes, including the iconic Marlboro brand, outside of the U.S., but it reports earnings in dollars, so it suffers when the buck appreciates. By contrast, Altria, which sells smokes (also including the Marlboro brand) only in the U.S., is largely impervious to currency fluctuations. Since the dollar started gaining steam last June, Philip Morris shares have slid 3%. But Altria's stock has been rising steadily over the past year; over that period, it has returned 37%. "Most of this is currency-related," says Hank Smith, chief investment officer at Haverford Trust.

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Like Whiston, Smith thinks investors are best served by betting on the contrarian call. Buy Philip Morris, he suggests. The share price, he says, already reflects the negative impact of currency conversions on 2015 earnings. The stock is cheaper than Altria on a price-to-earnings basis and boasts a mouthwatering dividend yield of 4.8%. (Altria yields 3.8%.)

You can also find winners among U.S. companies that buy goods overseas. That category includes everything from supermarkets and convenience stores to dollar stores and off-price retailers, says analyst Sean Naughton, of Piper Jaffray. His favorite stock in this category is Target (TGT, $77.35), the Minneapolis-based retailer, which stumbled last year after a data breach exposed about 40 million of its customers’ accounts to the risk of identity theft. Target has since been working to regain consumer trust. It also is in the process of divesting itself of its money-losing Canadian division. With all of Target’s operations now in the U.S. and with a new CEO, who took over last July, Naughton thinks the shares will outpace the overall market. His one-year price target: $85.

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Discounter TJX Companies (TJX, $67.67), the parent of T.J. Maxx stores, is in much the same position. William Blair & Co. recently added TJX to its “near-term focus” list, which aims to identify stocks likely to pop over the next 60 days. Blair analysts think the Framingham, Mass.-based retailer is likely to see profits jump 12% in the current fiscal year, which ends next January. That’s far more than the relatively tepid growth projected for Standard & Poor’s 500-stock index, though about par for the consumer-discretionary sector.

Aberdeen’s Bassett also likes Charles Schwab & Co. (SCHW, $29.09). How is the big discount broker a dollar play? One reason the buck has been so strong is that the U.S. economy is getting healthy, while most of the rest of the developed world’s economies stagnate. That should ultimately prompt the Federal Reserve Board to start raising short-term interest rates, which have been near 0% since 2008. Because rates have been so microscopic, asset managers, including such brokers as Schwab, have been forced to waive management fees on trillions of dollars in assets sitting in money market funds to prevent them from delivering negative returns. Once short-term rates return to more-normal levels, brokers such as Schwab will collect a bigger chunk of their money market fund management fees, and that should boost their profits.

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