According to the “second estimate” released by the Commerce Department last Friday, the GDP shrank 0.7% in the first quarter. This was only the third contraction in the post-recession period. The GDP number was revised downward from the “advance estimate” of a 0.2% rise. However, the contraction of 0.7% came in better than the consensus estimate of a 0.8% decline. Decline in exports, weak inflation and a harsh winter were believed to be the major reasons behind the contraction.
Meanwhile, a significant decline in business spending and a slower rate of growth in consumer expenditures also had a negative impact on first quarter GDP. According to the report, business spending declined 2.8% in the quarter, compared to a 4.7% rise in the fourth quarter. Moreover, personal consumption expenditures rose at a sluggish pace of 1.8% in the quarter, significantly lower than 4.4% rise in the previous quarter.
Impact of Stronger Dollar
Strength in the U.S. dollar had a huge impact on the trade deficit over the first quarter. While a stronger dollar dragged down the export demand in the first quarter, it also boosted import demand as it made foreign goods cheaper. The report showed that exports of goods and services slumped 7.6%, its biggest drop since the first quarter of 2009. The plunge comes after a 4.5% rise in the fourth quarter. Meanwhile, imports of goods and services surged 5.6% during the first quarter, revised upward from the “advance estimate.”
Moreover, the stronger dollar affected first quarter earnings results, especially revenue figures of companies that have significant international exposure. As of May 29, total earnings for 492 S&P 500 members were up 2.2% on 3.4% lower revenues, with 65.4% beating EPS estimates and 44.5% coming ahead of revenue expectations. These numbers indicated that the first quarter earnings season turned out to be very weak compared with previous quarters.
What Drove the Dollar Higher?
It is speculated that the divergent trend of monetary policies between the U.S. and other major economies is one of the major reasons behind the dollar strengthening. While the Fed is preparing for a rate hike this year for the first time since 2006, major economies including Europe and Japan opted for the intensified asset buying program to boost their respective economies.
Meanwhile, upbeat labor market conditions, inflation and housing market data pushed the dollar further against major currencies. As a result, the U.S. dollar was almost at a 13-year high against the yen while the Euro fell to a one-month low on the return of Greek debt worries. Though the Fed blamed “transitory factors” for the dismal economic conditions in the first quarter, impacts of factors including the stronger dollar are likely to continue for a significantly longer time frame.
3 Safe Choices
In this scenario, companies that are generally focused on the domestic economy are less affected by a stronger dollar. Moreover, several data released recently showed that the labor and housing market are improving at an impressive rate. According to the U.S. Labor Department, the unemployment rate declined to its lowest level since May 2008 to 5.4% in April. Separately, most of the housing market data were encouraging, indicating a strong recovery in this section.
Improvements in these important sections of the economy will help the domestic demand to increase in coming days. Companies that derive most of their revenues from the U.S. are poised to gain from this favorable environment.
Below we highlight three stocks that investors may find profitable. Their domestic operations make them less vulnerable to the strengthening dollar. Each of these stocks have a favorable Zacks Rank. Also, with our new style score system we have identified the key statistics to pay close attention to. The attractiveness of these companies as an investment option at this stage is confirmed by its Style Score of ‘A’ or ‘B.’
Target Corp. TGT operates large-format general merchandise and food discount stores in the United States. These include Target and SuperTarget stores.
This Zacks Rank #2 (Buy) retailer has a Growth Style Score of ‘B’ and an impressive forward PE ratio of 17.20. The Zacks Consensus Estimate for the current year EPS has been revised upward 1.3% over the last two months. Target’s first quarter adjusted earnings of $1.10 per share came higher than the Zacks Consensus Estimate of $1.03 and jumped 19.6% year over year.
Reynolds American Inc. RAI is one of the leading manufacturers and sellers of cigarettes and smokeless tobacco products in the U.S. This Zacks Rank #2 (Buy) company owns popular brands like Camel and Pall Mall. It is the parent company of R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company, Inc., Lane Limited and R.J. Reynolds Global Products, Inc.
Reynolds American has a Growth Style Score of ‘B’ and a forward PE ratio of 19.84. The Zacks Consensus Estimate for the current year EPS has been revised up 2.4% over the last two months. Reynolds American reported first quarter earnings per share of 86 cents, beating the Zacks Consensus Estimate of 79 cents and improving 19.4% year over year.
O'Reilly Automotive Inc. ORLY is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment and accessories to both do-it-yourself customers and professional mechanics or service technicians in the U.S.
Apart from having a Zacks Rank #2, the company has a Growth Style Score of ‘A.’ The Zacks Consensus Estimate for the current year EPS has been revised upward roughly 1.8% over the last two months. O’Reilly Automotive reported a 28% increase in earnings to $2.06 per share in the first quarter of 2015, exceeding the Zacks Consensus Estimate by 13 cents.
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