Monday, July 8, 2013

The One Company to Watch as the U.S. Dollar Strengthens

By Sasha Cekerevac

With corporate earnings season starting today, many investors will eagerly be looking at the results to determine if there is an investment opportunity for the next six to 12 months.

But wise investors will also be keeping an eye on the macroeconomic situation: we are entering a period of time in which the U.S. dollar will remain strong as our economy is set to outperform those of most other developed nations. As I’ve previously mentioned in these pages before, the outlook for the eurozone remains weak, China’s economy is slowing, and Japan’s economy is just now trying to emerge from having virtually no growth over the past decade.

The strength of the U.S. economy is relative—though it is better than its competitors, it is not growing at a very rapid rate. However, remember: the strength of a currency is based on relative value, not absolute.

That relative strength in the U.S. economy will translate into a stronger dollar, higher corporate earnings and investment opportunities. As a large investor, for example, I would much rather be invested in U.S. assets than European assets.

While a stronger dollar hurts exports, it improves the corporate earnings of importers. A perfect example of the recent shift is Starbucks Corporation (NASDAQ/SBUX).

The investment opportunity that Starbucks is able to monetize is the strength of the U.S. dollar as compared to currencies like the Brazilian real. Combining record-level harvests of coffee beans this year and last year with the real hitting a four-year low, the price of Brazilian coffee beans has dropped dramatically. Similarly, Columbia’s currency has also dropped significantly against the dollar, and has seen exports of its coffee beans increase significantly this year.

That lower cost of imported commodities for companies like Starbucks is creating an investment opportunity by generating higher corporate earnings. It’s a perfect example of a U.S. company benefiting from a stronger dollar.

Starbucks Corporation Chart

Chart courtesy of

Clearly, I am not alone in thinking that Starbucks will generate strong corporate earnings, as indicated by the strength of the above chart.

Starbucks is a company that continues to grow worldwide, as it sees an investment opportunity in building its brand globally. The reduction in the input cost of coffee beans will also help the company improve its corporate earnings, in addition to top-line revenue growth from expanding into new markets.

The point I would like to make is that, as investors, our goal is to look for companies that can increase their corporate earnings through an investment opportunity that suits their business models. Whether it is a higher dollar or a weaker dollar, it really doesn’t matter, as there are firms that can generate higher corporate earnings in either case. The key is to shift and reallocate assets into companies with higher probabilities of generating corporate earnings.

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