The US dollar has increased 12% so far in 2015 against the euro and is up 27% from a year ago. This has prompted Wall Street analysts to make deep cuts to earnings forecasts of US multinational companies, and increasing the appeal of smaller, domestically focused companies.
As a result, investors are keeping a continued bias toward U.S.-based stocks that do less business abroad, such as shares of small companies that tend to be more domestically focused, and on companies outside the U.S. that stand to benefit from a weakening of their home currency as the dollar strengthens, particularly European manufacturers. Tiffany & Co. announced sales fell 1% in January but would have risen 3% if not for currency moves.
Wells Fargo looked at how 2015 consensus earnings estimates for retailers have evolved over the past two years alongside how their stocks performed. Among the 51 firms sampled, estimates fell for 42, or 82%, of them. Three companies—Shutterfly, Aeropostale and J.C. Penney—saw declines of more than 100%. Yet retailers’ stocks performed fairly well over the period. Shares only declined for 13 of the 51. On average, the share price among the sample actually increased 46%. In other words, valuation multiples expanded.
Companies that generate more than 50% of sales outside the U.S. are expected to post an earnings decline of 11.6% in the first quarter when results start rolling in next month. Companies that generate less than half of sales outside the U.S. are expected to post flat earnings for the quarter.
David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., said that when the dollar has rallied in the past, consumer-discretionary and consumer-staples stocks have fared better than the broader market. These sectors have relatively low exposure to overseas markets.
Source: The Wall Street Journal
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