5 Best Stocks To Buy On Dollar's Newfound Strength

The U.S. dollar has been maintaining a strong rally for quite some time now. The strength can primarily be attributed to a couple of better-than-anticipated economic data. Buoyed by a resilient labor market and solid income gains, consumers remain the primary source of firepower for economic growth.

Small caps, being U.S.-centric, are better poised to weather a stronger U.S. dollar. This category of stocks is cushioned against the loss of competitiveness and currency translation impact of a stronger greenback. Needless to say, as dollar rises, multi-nationals lose their competitive advantage because foreign customers see U.S. goods as more expensive than non-U.S. goods.

What’s Driving Dollar?

The ICE (NYSE:ICE) U.S. Dollar Index, which measures dollar’s strength against a basket of major currencies, increased nearly 0.4% in the last trading session to 98.6160. While the euro fell to 1.1006 dollars in late New York trading, the British pound was down to 1.2424 dollars.

The greenback continues to rise as investors were encouraged by positive economic reports. According to the Commerce Department, sales at U.S. retailers rose 0.4% last month mostly led by motor vehicle and online purchases. Retail sales climbed north after an upwardly revised 0.8% increase in July. By the way, the measure that excludes car dealers, food services, building materials, stores and gasoline stations rose 0.3%, on par with projections. Needless to say, this core retail sales measure is predominantly viewed as a more reliable gauge of underlying consumer demand.

However, many may argue that not everything about the retail sales report has been hunky-dory. Seven of the 13 major categories saw a decline in sales figures, with restaurants seeing their steepest drop in almost a year. Department stores, groceries and apparel retailers also saw a decline in receipts.

But, there are a number of positives. Outlays at automobile and parts dealers went up 1.8% compared to the prior month, the highest since March. In fact, Ward Automotive Group had shown a 0.9% increase in August unit sales after declining to a three-month low in July. What’s more, non-store sales that include categories such as online shopping climbed 1.6%. The online category had posted a gain of 1.7% in July, thanks to Amazon’s 48-hour Prime Day event.

U.S. consumer sentiment, in the meantime, rebounded modestly this month. Per the University of Michigan, its consumer sentiment index came in at 92 in September, up from 89.8 in late August. Analysts had expected sentiment to rebound to 91.4. To top it, the current conditions index rose to 106.9 in September from 105.3 in the prior month. The index of expectations too rose to 82.4 from 79.9 in August.

What Does a Stronger Dollar Mean for Stocks?

A rising dollar impedes earnings growth, which suggests that returns from the equity market might be subdued. Particularly, companies that derive a lion’s share of their earnings from overseas will be dealt the biggest blow. Such companies are exposed to foreign exchange risks between the United States and other countries they are operating in. Thus, if dollar gains strength, it tends to dent foreign sales of such companies.

S&P Global (NYSE:SPGI) added that with every 1% rise in the greenback, large-cap companies with heavier U.S. concentration in terms of revenue generation have gained 71 basis points on average. For small caps, the correlation was way better.

5 Winning Stocks

Small caps are set to benefit from wider domestic revenue exposure, which insulates them from the effects of a stronger dollar. Thus, investing in stocks with high domestic exposure in terms of revenue generation seems prudent. We have picked five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Such stocks also have a Zacks Investment Research

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Written By: Zacks Investment Research