As the U.S. Dollar Weakens, These Stocks Should Benefit

Three companies have considerable emerging market exposure, which could provide a more potent hedge against a weaker U.S. dollar.

money on floor at feet

Since last April, the U.S. Dollar Index, which measures the currency’s price relative to other major currencies, has declined about 10%. The current 90.51 price marks a 3-year low. While this level remains about in the middle of the index’s 30-year band, there are credible risks that could push the dollar lower. Standout risks include vast new fiscal spending, aggressive Federal Reserve monetary policy, a recovery in emerging markets, and a less appealing investing environment due to potentially higher corporate taxes and regulations.

With so much going on, it’s easy to have missed the slip in the value of the U.S. dollar. But there are ways to take advantage of the weaker U.S. dollar.

Investors who want to capture potential further dollar weakness, or hedge their dollar-based holdings, have a wide range of vehicles. Currency futures contracts provide the most direct exposure, but these can be difficult to access by most investors and carry considerable risks.

Several ETF families offer a more conventional approach, including the Invesco CurrencyShares securities like the FXE (Euro), FXY (Japanese Yen) and others. While these ETFs may provide near-direct currency exposure, stock investors may instead be more comfortable holding equities of public companies with high international revenues. Also, as equities, these can be backed by companies that have enduring value, allowing investors to hold larger positions for longer, and receive a dividend along the way.

While technology companies generally have a high mix of international sales, their stocks currently are expensive. As such, the shares may move more with market sentiment than with the dollar.

Investing in lower-priced, less cyclical companies with stable revenues and high international sales may offer an appealing option. The three companies outlined below also have considerable emerging market exposure, which could provide a more potent hedge against a weaker U.S. dollar.

3 Value Stocks for a Weaker U.S. Dollar
One of the most widely recognized global brands, McDonald’s (MCD) generates nearly 62% of its revenues from outside of the United States. Of its 38,700 global locations, nearly 25,000 are spread across 118 developed and emerging countries. McDonald’s sales have remained relatively sturdy during the pandemic. Third-quarter global comparable-store sales recovered from earlier weakness to decline only 2.2%, showing that the company is adapting to the pandemic environment relatively well. Surprisingly, McDonald’s shares have been nearly flat since the beginning of 2020. The stock trades at a 25x multiple of forward earnings, comparable to its average over the past few years, and offers a solid 2.5% dividend yield.

Philip Morris International (PM) generates 100% of its revenues from outside of the United States, with nearly 45% produced in emerging markets. Formerly the international tobacco operations of the original Philip Morris company, now named Altria (MO), PM International was spun off in 2008. The company produces over $29 billion in revenues and holds a leading 28% share in international markets outside of China. Aware of the shift to smokeless products, PMI is investing heavily in this category, which now generates 23% of its total sales. Profit margins and cash flow are generous, while the debt balance is strong, particularly given the stability of the company’s business. Trading at a modest 14x forward earnings, with a 5.9% dividend yield, PM shares offer an attractive way to participate in a weak U.S. dollar.

Chicago-based Mondelez International (MDLZ) produces some of the world’s most popular chocolate bars, chewing gums, crackers and related snacks, including Oreo’s, Cadbury and Toblerone. About 75% of its revenues are generated outside of the U.S., with a sizeable 37% of revenues from emerging markets. Snacks are a secular growth industry, and Mondelez is well-positioned to participate as the #1 or #2 player in the major categories. Its renewed focus on better execution is helping the company drive further revenue growth and margin expansion. Mondelez shares have hardly budged since mid-2019. At 20x forward earnings, the shares aren’t expensive and may not fully recognize the value of its 11% stake in KeurigDrPepper (worth ~$5 billion) and JDEPeets (worth ~$4 billion). MDLZ shares pay a 2.2% dividend yield.

All three of these stocks, which held steady during the pandemic, should be safe bets for the future.

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