3 Stocks for a Stronger U.S. Dollar

The dollar declined on Wednesday following fears sparked off by the political situation in Greece. Investors took profits near the end of the year as markets moved lower and capital moved into U.S. Treasury securities. This caused a drop in bond yields, which pushed the dollar lower.

This comes at a time when the dollar has been enjoying multi-year highs. The dollar has been strengthening against major currencies in recent months. The strength is most likely to prevail, helping stock investors earn from top Zacks ranked potential winners with significant business exposure within the U.S.

Multi-Year High

The dollar had touched its highest level in nearly six years following better-than-expected U.S. jobs data. Non-farm payrolls increased 321,000 in November. This is the largest single-month increase since Nov 2012 and significantly higher than expectations of an increase of 230,000.

However, the dollar declined over the next two days due to a combination of factors. A fall in global stocks following low oil prices and dismal Chinese data on Monday led to these losses along with the political situation in Greece.

Additionally, there were comments from the Atlanta and San Francisco Federal presidents that the phrase “considerable time” should continue to be used in Fed policy statements. These factors combined to cause the dollar to drop to 118.78 against the yen. At one point, the greenback had slumped to 117.9, losing in excess of 2% before recovering considerably.

But the decline is being viewed as one caused by profit-taking and the rush for a safe haven in the backdrop of dismal global factors. The fundamental view of the dollar continued to be strong, and the market was simply undergoing an adjustment after the dollar's strong gains in October and November.

Resilient Domestic Economy

In fact, the Atlanta Fed chief added that the U.S. Central Bank should still be in a position to raise interest rates later next year. This will lead to further gains for the dollar. Both the strong dollar and better-than-expected jobs report are indications of the strength in the domestic economy. This is in sharp contrast to global weakness, which remains a cause for concern.

A strong dollar combined with low oil prices are good news for the consumer as expenditures can be easily stepped up ahead of the holiday season. Imports will also become cheaper as the domestic currency strengthen. However, exports will lose their sheen as they become costlier.

At the same time, companies conducting a large portion of their business overseas will stand to lose. This is because earnings repatriated will be converted into a smaller number of dollars.

Recently, Bespoke Investment Group undertook a comparison of stocks included in the Russell 1000 index that generate in excess of 50% of their revenues abroad with those which conduct more than 90% of their sales within the U.S. In 2014, those with higher domestic sales had gained nearly 7% through Oct 2 compared to 1.7% for those with significant international operations.

Large globally diversified companies such as Apple Inc. AAPL, IBM Corp. IBM and Chevron Corp. CVX conduct 61%, 65% and 76% of their sales from countries besides the U.S. and Canada. They may stand to lose from the rising dollar. In such a situation, the attractiveness of companies that conduct most of their business within the U.S is increasing.

Our Choices

In such a scenario investors stand to benefit with companies which garner nearly all of their revenues domestically. Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.

CVS Health Corporation CVS has a distinctive business model which leverages a combination of drug store retail and pharmacy benefits management. It is expected to benefit from an aging population, and a strong dollar will be another important factor which boosts growth.

CVS Health holds a Zacks Rank #2 (Buy) and has expected earnings growth of 12.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 20.31.

Reynolds American Inc. RAI reportable segments comprise RJR Tobacco, American Snuff, Santa Fe and All Other. RJR Tobacco is a leading cigarette manufacturer, which operates mainly in the U.S. American Snuff is a leading smokeless tobacco product manufacturer in the U.S. Santa Fe manufactures and markets cigarettes as well as other tobacco products under the Natural American Spirit brand.

Apart from a Zacks Rank #2 (Buy), the company has current year expected earnings growth of 6.7%. It has a P/E (F1) of 19.58x.

City National Corporation CYN is based in Los Angeles and offers banking, investment and trust services to small and mid-sized companies, high net worth individuals and entrepreneurs. City National operates through three segments: commercial and private banking, wealth management and other.

City National holds a Zacks Rank #2 (Buy) and has expected earnings growth of 6%. It has a P/E (F1) of 18.71x.

Despite the short-term slip, the long-term outlook for the dollar remains unchanged. Companies which conduct most of their business within the U.S. stand to gain. Given these factors, adding these stocks to your portfolio would be a prudent choice.