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So how do stock market investors make money off a falling U.S. dollar?
When the value of the dollar tumbles versus foreign currencies, the time-honored advice is to buy shares of the big U.S-based multinationals that do so much business overseas.
When the foreign earnings of a PepsiCo (PEP, news, msgs), a McDonald's (MCD, news, msgs) or an IBM Corp. (IBM, news, msgs) are translated from expensive euros or rubles into cheap U.S. dollars, revenues and earnings at that kind of company will soar.
But there's another group of stocks that does even better when the dollar is doing badly. Shares of small to midsize U.S. exporters can add big gains in market share overseas when a weak dollar makes their products cheaper for overseas customers.
Because of these companies' modest sizes, the swing in revenue from an increase in export business can have a much bigger impact on the bottom line than at a larger company such as PepsiCo. And because the gains are in new business and in market share, they're likely to have a longer-lasting effect on revenues and profits than the kind of gains that come merely from translating strong currencies into weak dollars.
What kind of company do you look for?
- Ideally, a company with revenue of less than $10 billion and a market capitalization of less than $5 billion in a big and fast-growing global market.
- The company should sell products that are in demand overseas and do more than 20% of its business outside the United States.
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- The company should be based in the U.S. and report its earnings in dollars, giving it the benefit of currency gains when it reports its results.
- And, so that the company's sales get the full benefit of a weak dollar, it should do a good part of its manufacturing in the U.S., making its exports more attractive to overseas customers as the dollar gets cheaper.
- Oh, it wouldn't hurt if the company's major competitors were doing business in stronger currencies, so that the weakness of the U.S. dollar was a weapon that the company could use to pick up market share.
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I've found five stocks that fit that description. I'm going to list them here and tell you a bit about all five. And I'm going to add one, Dynamic Materials (BOOM, news, msgs), to Jubak's Picks with this column. I've listed the stocks in alphabetical order:
Dynamic Materials
This company specializes in explosion-welded metal plates. Explosion welding uses an explosive charge to bond two plates of a base metal such as carbon steel with metals such as titanium or stainless steel that don't bond easily in traditional welding techniques.Explosion welding is used in products that require resistance to corrosion, high temperatures and high pressures. That means that Dynamic Materials sells into some of the fastest-growing, most recession-resistant markets in the world: oil and gas exploration and production, oil refining, chemical production, aluminum production, shipbuilding, power generation and industrial refrigeration. No wonder that revenue is projected to grow by 35% in 2007 over 2006 and that it climbed by 49% in this year's third quarter.
About 50% of 2006 revenue came from outside the U.S., a figure that will rise for 2007 because the company recently bought out its largest European competitor, DYNAenergetics of Germany. The company's major competitors include Japan's Asahi Kasei.
Continued: 4 more stocks to consider
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