3 Stocks in Focus on Strengthening Dollar

The minutes of the Federal Open Market Committee’s (FOMC) Sep 16-17 meeting that were released last Wednesday suggested the central bank is no mood for immediate rate hikes. The Fed cited stronger dollar being one of the main reasons behind its decision not to hike rates now. The U.S. dollar has risen against most of the major currencies in recent times, which has triggered concerns about the country’s external sector.

The Fed blamed “persistent” global growth worries for this recent rise of dollar. The Fed minutes noted: “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector."

Global Growth Worries

It was reported that factory orders in Germany dropped 5.7% in August, its biggest decline since 2009. Declining demand in both the Euro-zone and China, and tensions related to Russia-Ukraine crisis that led to sanctions have negatively impacted orders in Germany, Europe’s biggest economy. It was preceded by the country’s dismal industrial production data that suffered 4% drop in August, its biggest fall in five and a half years. These data from Germany intensified concerns regarding sluggish growth in the Euro-zone.

Moreover, Spain’s statistics institute INE reported that industrial production experienced its slowest rate of growth in August in a year. INE reported that industrial output rose 0.6% in August on a year-over-year basis, compared to revised growth rate of 0.9% in July. Also, a report released by HSBC/Markit showed that China’s services Purchasing Managers' Index (PMI) declined from 54.1 in August to 53.5 in September.

Though a reading above 50 indicates expansion in the sector, growth in the country’s services sector slowed in September. Also, Japan witnessed major drops in factory orders, consumer spending and real wages in August which signaled toward sluggish growth in the country.

The International Monetary Fund (IMF) lowered global growth forecast following these dismal data. IMF now expects global growth to be 3.3% this year, down from previous forecast of 3.4%. It blamed sluggish growth conditions in Japan, Latin America and Europe for lowering its guidance.

Global Growth Worries Driving Dollar Up

These growth worries in major economic blocks have negatively impacted their respective currencies. Most of these currencies have become weaker against the U.S. dollar as economic growth in the U.S. has outperformed the sluggish growths in these major economies. The following chart explains the recent trend of dollar movement against some major currencies over the last three and six months.

US Dollar vs Currencies	3 Months Change	6 Months Change
US Dollar ($) – Euro (€)	+7.8%	+9.4%
US Dollar ($) – Japanese Yen (¥)	+5.7%	+5.3%
US Dollar ($) – British Pound Sterling (£)	+7.5%	+5.3%

In the FOMC meeting, the policy makers evaluated the impact that weak growth abroad and a stronger U.S. dollar will have on the country’s trade sector and growth outlook. Fed minutes noted that while stronger dollar will make U.S. exports less competitive by inflating export prices, it will also reduce import prices. This is quite evident from declining trend in import prices over the past three months. The U.S. Bureau of Labor Statistics reported that import prices dropped 0.5% in September following 0.9% decline in August and 0.3% drop in July.

In fact, the FOMC’s downward revision to its GDP growth forecasts was partly a function of these developments. Moreover, a stronger dollar could keep inflationary pressures in check, below the Fed’s 2% target, for longer.

3 Stocks in Focus

In this scenario, here are three U.S. stocks that have significant exposure in international markets and may witness some effects of stronger dollar in their international business:

Wal-Mart Stores Inc. (WMT) is the world's largest retailer. They run mass merchandising stores, which serve their customers primarily through the operation of three segments, which are the Wal-Mart Stores segment, the SAM'S Club segment and the International segment. This Zacks Rank #4 (Sell) company operates in 27 countries through its international segment.

Wal-Mart has current year and next year EPS growth estimates of -1.6% and 8% compared to the industry growth rates of 0.9% and 8.8%, respectively. The company has PE ratio of 15.42. The Zacks Consensus Estimate for the current year EPS has been revised 0.8% downward over the last two months.

McDonald's Corp. (MCD) develops, operates, franchises and services a worldwide system of restaurants that prepare, assemble, package and sell a limited menu of value-priced foods. This Zacks Rank #4 (Sell) company carries out its operation in more than 110 countries.

McDonald's has current year and next year EPS growth estimates of -3.2% and 8.9% compared to the industry growth rates of 12.6% and 20.2%, respectively. The company has PE ratio of 16.89. The Zacks Consensus Estimate for the current year EPS has been revised 3.6% downward over the last two months.

International Paper Company (IP) is a global paper and forest products company that is complemented by an extensive distribution system. The company produces printing and writing papers, pulp, tissue, paperboard and packaging and wood products. Its primary markets and manufacturing and distribution operations are in the United States, Europe and the Pacific Rim.

This Zacks Rank #4 (Sell) has current year and next year EPS growth estimates of 8.5% and 18% compared to the industry growth rates of 1.7% and 19.7%, respectively. The company has PE ratio of 13.26. The Zacks Consensus Estimate for the current year EPS has been revised almost 4% downward over the last two months.

Bottom Line

Strengthening dollar will have significant effect on those companies which have larger international market share. Thus, investors need to be watchful on these three stocks during dollar’s positive rally.

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