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Profit from the shrinking dollar
The dollar's got big problems. But investors can get ahead by buying into U.S. companies that profit abroad and foreign stocks that pay dividends. Here are some of the best bets.
By Michael Brush
Heading to Europe this summer? Buy your euros now. Eyeing a new Honda? Get to the dealer, quick. Got a Wal-Mart itch? Scratch it now.
The once-muscular dollar, you see, is atrophying.
Or at least that's the view of some experts. The dollar is a terribly flawed currency, says Jim Rogers, author of "Adventure Capitalist: The Ultimate Road Trip." The chief flaw? We're flooding the world with dollars, thanks to U.S. consumers hungry for cheap toys from China, dependable cars from Japan and expensive oil from all over.
There are plenty of other reasons for the dollar to dive. Growth is picking up in other countries -- most notably in Japan -- making those markets more interesting places to invest. The Federal Reserve is considering an end, or at least a pause, to its spate of interest-rate hikes, meaning foreign investors may soon get more competitive rates via other currencies. And U.S. politicians continue to goad China about its undervalued currency, hoping to fix the trade deficit by making Chinese goods more expensive.
Together, these factors could force the dollar to sink another 20% against the major world currencies over the next five years, believes economist Jim Paulsen, a Wells Capital Management investment strategist who has a knack for making long-term market calls.
Related news and commentary on MSN Money
Axel Merk, manager of Merk Hard Currency Fund (MERKX), thinks it could be even worse. We would not be surprised to see 5% to 10% depreciation per year, he says.
The dollar's weaknesses
The good news is that, as an investor, you can profit from the weakening dollar in several ways. I'll explain how in a minute. But first, heres a look at why the U.S. dollar will get weaker in the coming years.
No. 1: The U.S. buys too much stuff abroad.
The U.S. has such a thirst for foreign goods that its trade deficit with the rest of the world topped $800 billion last year. Put another way, this means every day foreigners need to buy around $2.2 billion worth of U.S. goods just to keep the dollar from falling, Merk says.
They arent keeping up. Instead, all those dollars that U.S. consumers throw into the global markets to buy goods and services are pushing down the value of the dollar. We are the largest debtor nation the world has ever seen, and it is getting worse at a rapid rate, says Rogers.
Part of the problem is that some of our major trading partners in the developing world -- China, specifically -- take steps to keep their currencies cheap against the U.S. dollar so they can sell us more stuff. Chiefly, they sell their own currencies and buy dollars, which pushes the value of their currencies down.
But U.S. policymakers are fed up. So theyre going to continue to pressure these countries to let their currencies revalue against the dollar, says Paulsen. The upshot will be a dollar that weakens against developing world currencies, the way it has against the euro in recent years. Paulsen believes the dollar could lose 50% of its value against the Chinese yuan over the next five years. He looks for dollar weakness against Latin American countries for the same reason.
No. 2: Foreign growth is picking up.
Global investors put their money where the growth is -- and theyll probably continue to find stronger growth outside the U.S. for several years. Their investing habits will push up the value of foreign currencies relative to the dollar, says Paulsen. Emerging economies are growing at more than 7% a year, compared to 5% growth in the U.S. And while the U.S. economic cycle may soon start to look a little long in the tooth, other major economies like Europe and Japan are just hitting their stride.
No. 3: The U.S. is an increasingly unfriendly place for foreigners to put their money.
So they are doing less business here -- which means they buy fewer dollars. In the past year, the U.S. blocked a state-run Chinese energy company from buying U.S.-based Unocal, and there was a public outcry over news that a Dubai-based company would manage some U.S. ports. We are telling foreigners they cant use their money to buy what they want to buy, so they are putting their money elsewhere, says Rogers.
The Sarbanes-Oxley Act of 2002 makes it more burdensome for foreign companies to list their stocks or launch initial public offerings in the U.S. So they do it elsewhere. And many wealthy individuals in the Middle East are worried about investing in the U.S. for fear their accounts might get frozen, inadvertently or otherwise. All of this means less demand for U.S. dollars.
Here are some strategies for making money off a declining dollar.
Buy U.S. companies that profit abroad
The logic here is simple. A weaker dollar means their foreign revenue has more buying power as it gets converted into dollar-denominated earnings back home. Chewing-gum maker William Wrigley Jr. (WWY, news, msgs) is a great play on this theme because it generates more than 60% of its revenue in foreign countries, says Pat Dorsey, the director of stock analysis at Morningstar (MORN, news, msgs).
People in emerging markets like India and China dont chew as much gum as consumers in the U.S. -- which leaves lots of room for Wrigley to grow abroad, believes Dorsey. Last quarter, for example, sales in Asia grew 26% thanks to strength in China, Vietnam, Indonesia, Malaysia and the Philippines.
Investors who buy Wrigley stock now are getting it on the cheap. Wrigley stock got popped over the past seven months, falling 19% to $47 on concerns that the company will have to spend more than expected to integrate the Altoids and Life Savers brands purchased from Kraft Foods (KFT, news, msgs).
But this will only be a bump in the road. Wrigleys popular Spearmint, Doublemint and Juicy Fruit brands help make it the world's biggest gum maker, with more than $3 billion in annual sales and 60% of the U.S. gum market. That kind of clout means Wrigley can muscle the new brands into its distribution channels, especially in countries where they are less well known.
Investors were also dismayed in early April by the resignation of Wrigleys chief operating officer. But the departure is no red flag, says Deutsche Bank Securities analyst Eric Katzman. Instead, the COO probably left because Wrigley has always been a tightly controlled family affair, leaving little room for outsiders to move up in the ranks, say Katzman. He has a 12-month price target of $58 on the stock.
Buy exporters
So head for the exporters, or those that supply exporters. Rather than picking a U.S. manufacturer, Ill go with a company that supplies many of them, such as NewMarket (NEU, news, msgs). The company sells additives put in lubricants used to grease machinery factories. It also makes petroleum additives. Sales should get a boost as continued economic growth increases demand for fuel.
NewMarkets chart looks ominous. The shares have more than tripled since October to trade recently for around $51. But other factors point to more strength ahead. A director recently bought a big slug of stock -- $4.7 million worth -- at $42, not too far below current levels, according to Thomson Financial.
And theres still a broad gap in profit margins between NewMarket and its chief competitor Lubrizol (LZ, news, msgs). NewMarket will continue to close that gap, in part, with price increases, believes Robert Robotti of Robotti & Company Advisors. Robotti is placing a huge bet on NewMarket, with more than 5% of his assets in the stock. Hes worth following in small-cap stocks because he has produced 17.8% annualized gains in this arena over the past five years, compared to 8.2% for the Russell 2000.
Buy foreign stocks that pay dividends
Here, you get two things working in your favor. First, those foreign dividends will be worth more over time as the U.S. dollar weakens. Next, youll earn more because of the mechanics behind American Depositary Receipts (ADRs), the market instrument used to list the four stocks below on U.S. exchanges.
ADRs are securities issued by U.S. banks in place of foreign shares, which the banks hold in a trust. When the dollar weakens, it drives up the price of the ADR because it takes more dollars to buy the same number of foreign shares backing the ADR.
Morningstars Dorsey favors three ADRs:- Lloyds TSB Group (LYG, news, msgs), a UK bank, is slated to pay investors $2.39 a share this year, for a dividend yield of 6%. The banks respected brand name and huge deposit base should help it grow.
- Telecom Corp. of New Zealand (NZT, news, msgs) is expected to pay a dividend of $1.95 a share this year for a yield of 6.7%. The phone companys dominant position supports its huge cash flow, says Morningstar analyst Michael Hodel.
- France Telecom (FTE, news, msgs) will pay $1.16 a share in dividends this year for a 5% yield. The company also produces lots of cash flow, and its position in high-growth developing countries like Poland offsets slower growth in France.
Here's one more: Total (TOT, news, msgs), a French energy company, should pay $4.13 in dividends this year, for a yield of 3%. Peter Schofield, a portfolio manager at Knott Capital, likes Total because it has done a good job of increasing its oil-reserve base, unlike many of the major energy companies.
Investors can also benefit from a declining dollar by getting exposure to commodities, which tend to go up as the dollar weakens. Or you can buy shares of foreign currency mutual funds -- such as the Merk Hard Currency Fund, the Franklin Templeton Hard Currency Fund (ICPHX) and the Rydex Dynamic Weakening Dollar Fund (RYWBX).
These funds have exposure to foreign currencies in accounts abroad, so as those currencies strengthen, the fund shares go up. The Merk fund offers more exposure to European currencies, while Franklin Templetons fund has an Asian bias. The Rydex fund uses leverage to place bigger bets, so it swings more dramatically when the dollar moves. The Rydex Euro Currency Trust (FXE, news, msgs) exchange-traded fund also offers pure euro exposure.
New pick
With this column, I'll add William Wrigley to my Expert Picks tracking porfolio, and we'll see how it does from here.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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