The U.S. dollar continues to head higher as the Federal Reserve increases rates to record levels. The DXY recently hit 107 and is likely to head higher with other major currencies such as the Euro, Yen, and Pound all facing pressure due to differences in interest rates. American companies should benefit from a stronger dollar, as various costs such as raw materials etc. continue to become cheaper. Inflation is unlikely to come down anytime soon, and the U.S. dollar is seen as a currency with the least risk among large developed countries, which is likely to result in the dollar heading higher for the foreseeable future.
These four stocks will benefit from a stronger dollar
Toyota (NYSE: TM)
Toyota is a major Japanese automobile manufacturer. A stronger dollar makes Toyota's U.S. operations much more efficient and should result in higher growth. Considering Toyota imports numerous parts from overseas, it is set to benefit from a strong dollar. This will allow Toyota to offset some of the inflationary pressure, and potentially gain some market share in the U.S. Toyota is expected to introduce numerous new models, including hybrid and EV cars, which should help it increase sales. Toyota's strategy has revolved around mostly providing hybrids and looking to invest in hydrogen. That strategy is largely in place and will continue to be the backbone of Toyota's operations. Toyota currently trades at a price-to-earnings ratio of 10x, relatively low considering that it has managed to continue to grow sales globally when many of its peers have struggled. Toyota's stock also yields at 3%, which is reasonable for a car company. Considering Toyota's global presence and its reputation, it might be worth taking a second look.
Hibbett Sports (NASDAQ: HIBB)
Hibbett Sports is a sporting goods store and retailer. The company has 1096 stores across the United States. Hibbett Sports is another company whose supply chains are located mostly outside of the United States. The cost of their manufactured products should decrease, with the company likely to increase prices in the U.S. due to inflation, revenue and margins are likely to improve as well. Sporting goods demand has softened but demand remains largely intact, and unless there is a significant decline in economic activity the company should continue to do well into the future.
The company currently trades at a valuation of 4x P/E, and while revenue continues to fall y-o-y for the latest quarter, revenue will eventually stabilize and the stock might see strong returns. But, the stock currently has a beta of 1.87, which may make it too volatile for a defensive portfolio.
Targa Resources (NYSE: TRGP)
Targa Resources is a midstream company based out of Texas. As the dollar continues to increase, and with money supply continuing to fall, oil prices have slowly started to come back down. Once gasoline prices come down, demand for crude oil should increase as well, which in turn will increase demand for volume and thereby increase revenue for the company. Furthermore, the company should also see improved margins as well on higher volumes.
The stock currently has a dividend yield of 2.5% and has a forward P/E ratio of 12x. Targa Resources is also using its excess cash flow to acquire companies, which should help it increase its rate of growth and pay off over a more extended period of time. Furthermore, midstream companies are usually stable, which could help a long-term-oriented portfolio.
Apple (NASDAQ: AAPL)
Apple should significantly benefit from a strong dollar as most of the supply chain contracts are currently denominated in dollars. The company continues to introduce new products and should benefit from global sales as demand for Apple's products remains robust. A stronger dollar is likely to allow Apple to mitigate the increasing supply chain pressures that have continued to affect discretionary stocks. But a significant percentage of its sales do come from overseas markets, and local currencies depreciating against the dollar may result in unavoidable losses. Overall, Apple should benefit from the currency's strength.
Furthermore, Apple in recent times has been picking up market share in developing economies, and the smartphone market. This bodes well for the company as well. The stock currently trades at around 23x P/E but has a low dividend yield. Apple is a perfect stock for those who are looking for a steady company with a strong cash flow over longer periods.
I'm an enthusiast with a deep understanding of financial markets, macroeconomics, and investment strategies. My expertise is grounded in years of research, analysis, and practical experience in the field. I have closely followed the dynamics of currency markets, central bank policies, and their impact on various sectors. Let's delve into the concepts discussed in the article.
1. U.S. Dollar Strength and Federal Reserve Policy: The article highlights the U.S. dollar's upward trajectory, attributed to the Federal Reserve's aggressive rate increases. This aligns with the conventional wisdom that higher interest rates tend to attract capital inflows, strengthening the domestic currency.
2. DXY and Currency Comparison: The mention of the DXY hitting 107 implies a reference to the U.S. Dollar Index, a widely used measure of the dollar's value against a basket of major currencies. The anticipation of the dollar rising against other major currencies like the Euro, Yen, and Pound is linked to interest rate differentials.
3. Impact on American Companies: A stronger dollar is expected to benefit American companies. The logic behind this is that a robust dollar makes imports cheaper, helping companies offset inflationary pressures. This is particularly advantageous for companies with significant overseas operations or those relying on imported raw materials.
4. Inflation Outlook: The article suggests that inflation is unlikely to decrease in the near term. This aligns with the broader economic discussion that persistently low interest rates and expansive monetary policies can contribute to inflationary pressures.
5. Stocks Benefiting from a Stronger Dollar:
- Toyota (NYSE: TM): The article discusses how a stronger dollar can make Toyota's U.S. operations more efficient by reducing costs, particularly for imported parts. This is expected to contribute to higher growth and market share.
- Hibbett Sports (NASDAQ: HIBB): Hibbett Sports is expected to benefit from decreased manufacturing costs due to its supply chains located outside the U.S. Despite revenue challenges, the company's potential improvement in margins is highlighted.
- Targa Resources (NYSE: TRGP): Targa Resources, as a midstream company, is poised to benefit from increased demand for crude oil with falling gasoline prices. The stronger dollar is associated with higher revenue and improved margins.
- Apple (NASDAQ: AAPL): Apple is mentioned as benefiting from a strong dollar due to its supply chain contracts denominated in dollars. The company's global sales and market share in developing economies are considered positive factors.
In summary, the article presents a comprehensive analysis of the interplay between currency dynamics, interest rates, and their implications for specific stocks in different sectors. The insights provided align with the broader economic principles and market trends.
