How to Profit from a Declining Dollar
byAug 5th 2011 5:15PM
The sky is falling and the dollar is falling on top of it. Whether it's concerns about national debt levels, quantitative easing, or our trade deficit, many signs point to the dollar's continued decline.
Pundits would have you believe that this is the worst thing that could happen to the U.S. -- our purchasing power would go down, commodities like oil and gold would become more expensive, and we might lose our reserve currency status.
Each of those points may or may not be true. But what's certainly true is that there are plenty of ways to make money on a falling dollar. And, no, we're not talking about betting on risky commodities -- we're talking about good old-fashioned stocks.
Whether through cash they hold in foreign lands, sales they make overseas, or products they export, these are great companies that can profit from a falling dollar.
Opportunity #1: Companies Keeping Cash Overseas
U.S. companies have taken a lot of flak lately for sitting on hoards of cash overseas. Of course they're getting hassled: The U.S. government doesn't tax money that hasn't been repatriated, and it's cash that isn't being put to work to help the U.S. economy. But overseas cash is an opportunity for investors.
While disclosure isn't always forthcoming, it's likely that a good chunk of foreign cash holdings are denominated in foreign currencies. If the dollar continues to fall, the cash these companies hold will become even more valuable in relation to the dollar. For example, Microsoft (MSFT), Apple (AAPL), and Cisco (CSCO) are three of the biggest collectors of foreign currency on the stock market. They ended the first quarter with $42 billion, $40.2 billion, and $38.8 billion in foreign cash hoards, respectively. With strong businesses, that should continue to grow.
Opportunity #2: Companies That Make Money Selling in Foreign Markets
When the dollar falls, it makes profits overseas worth more for companies reporting in the U.S. If you're worried about a falling dollar, consider U.S.-based companies with large international sales.
At conglomerate 3M (MMM), more than 65% of revenue comes from international markets, and the amount of money made in emerging markets continues to grow. This gives investors lots of exposure not only to growing emerging markets but also to stronger foreign currencies. 3M also manufactures many of its high-tech products in the U.S. for export internationally, an advantage we'll get to in a minute.
You can even make investments on U.S. exchanges in foreign companies that have most of their sales outside of the U.S. There are also a slew of internationally focused mutual funds and ETFs that can reduce company risk and still provide the same kind of exposure.
Opportunity #3: "Made in the U.S.A." That's Sold Overseas
There's a reason China has gone to such extreme lengths to keep its currency low: The Chinese know that a weak currency means more exports. If the dollar continues to fall, a weaker currency could help the manufacturing base here in the U.S. Plus, if China's currency rises relative to the dollar, its low-cost labor will become less of an advantage, and some of those jobs will move home.
Commercial aircrafts and agricultural products like corn and soybeans are some of our major exports.
Boeing (BA) has huge manufacturing plants in the U.S. and derives nearly half of its revenue from abroad. Archer Daniels Midland (ADM) and Deere (DE) have strong international sales. While not direct currency plays, their export operations would benefit from a declining dollar.
Motley Fool contributor Travis Hoium owns shares of 3M. You can follow Travis on Twitter at @FlushDrawFool and follow his CAPS picks at TMFFlushDraw.
The Motley Fool owns shares of Apple and Microsoft. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Cisco Systems, and 3M. Motley Fool newsletter services have recommended creating a covered collar position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.