Currency Headwinds Present New Buying Opportunities
As earnings season winds down, the strength of the US dollar has created significant headwinds for many multinational US corporations, while at the same time creating new potential buying opportunities for investors in the long-term.
Leading the charge in these currency headwinds has been the continued weakness in the Euro, as many US companies derive a significant portion of their revenues from the Eurozone. Adding to this, the ECB announced in January that it will commence a 1 trillion euro quantitative easing program, putting even more pressure on the euro, driving the currency to eleven year lows versus the US dollar.
A specific example of this can be seen most recently with UPS [NYSE: UPS], which reduced its Q4 earnings expectations – citing US dollar strength as one negative factor – driving its shares down 9%. Proctor and Gamble [NYSE: PG], called the weakening of foreign currencies against the dollar “unprecedented”, and reduced its full year sales forecast by 5% as a result. United Technologies [NYSE: UTX], cut its sales and profit forecast for 2015 due to the strong dollar. The company cut its sales forecast by $1.5 billion, to a range of $65 billion to $66 billion. CEO Greg Hayes stated, “It is really just one word, and that is “currency”, that we are focused on”. Dupont, Microsoft and Pfizer also blamed the stronger dollar as a negative factor impacting sales and profits.
Although this is a short-term negative, companies whose underlying businesses are performing well, and whose stock prices are hit due to the strengthening dollar may in fact be good long-term buys. Currency headwinds are not likely to last in perpetuity, and at the very least should moderate, compared to the pronounced moves experienced recently. Additionally, continued strength in the US economy should provide a tailwind for US companies going forward. Over the long term, the QE enacted by the ECB will promote growth in the Eurozone, which should help earnings at US multinationals as well.
Companies are already taking action to improve efficiency to protect profits. P&G is reducing headcount and shifting a larger portion of their advertising budget to digital. The company is also raising prices on some products in order to improve the top line. Although these moves will take time to affect the income statement, over the long term P&G and other companies will become leaner and more efficient. As currency headwinds ease over the medium to long term, profit margins and earnings may improve leading to higher share prices.
As earnings season comes to a close, we expect to see more US companies reduce forecasts due to currency headwinds. Therefore, we believe that in the current market environment there is good reason to consider selling a few winners in the portfolio in order to capitalize on potential opportunities in US multinational stocks.
All ideas expressed in this article are the opinions of Ideal Asset Management LLC.
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