Has the dollar finally made a turn?

The FED is set to make an announcement on short term rates tomorrow. Most expect a 25 basis point cut with a statement that points to the end of rate cuts. If that happens, we could see the dollar strengthen and an end to all of the inflation driven trades. This has forced me to think about all of the stocks in my portfolio. The following is a list of the stocks that I own, listed with the closing price on 4/28/2008, and what I think a strengthening dollar would mean to each of them.

AAPL (172.74) – I haven’t heard about the weak dollar being a great benefit to AAPL, so I don’t think it would have a negative effect.

BEAV (39.84) - This company does business with a lot of international carriers, so the weak dollar probably has helped. The main reasons to buy this stock right now are 1. Worldwide air travel is growing. 2. The Boeing 787 is going to be a huge deal for BEAV, although so far it’s been a detriment b/c it’s been delayed so many times. 3. With high fuel costs being such a concern to airlines, they are looking for ways to cut costs. This ties back to reason 2 b/c the 787 is lighter an much more fuel efficient. 4. The domestic airlines are raising prices and I look for them to be on more solid footing in the next few years. However, they still need to upgrade their aging fleets and this again plays into BEAV’s hands. So, overall we have some mention of the weak dollar, but it’s not the only reason to buy the stock. I would say that a strengthening dollar would hurt BEAV, but it would also help in other areas, so hopefully it would work out about even.

CHK (53.80) - We have been hearing a lot about how nat gas is cheap relative to oil and a lot of people think it will continue to go higher. If commodities prices got hit across the board, CHK would also get hit. We’d have to hope that nat gas prices held on better than other commodities.

EVT (25.46) - This is a closed end fund which invests in a lot of multinational companies that are based all over the world. About 20% of the holdings are in the oil & gas sector and about 20% of the holdings are in the financial sector. Since I have owned this fund, it has tended to trade in line with the market, so I have to think a strengthening dollar would be a positive for some stocks in the fund and a negative for others. I like owning this fund because it has a lot of high yielding preferred stocks and also a lot of dividend growth stocks. I would want to continue to own this fund as the reason I bought it is still in tact whether the dollar strengthens or not.

EWT (16.92) - This is a Taiwan ETF. A strengthening dollar would most likely be positive as Taiwan exports a lot of goods to the U.S. and China, which also exports a lot of goods to the U.S.

FWLT (68.08) - This company builds a lot of plants that are used for energy production. The majority of their revenues come from overseas. The main question would be whether or not they could get enough business to overcome the strengthening dollar. On one hand you can say a strong dollar hurts them, but because their services are in such demand, maybe they would have pricing power. I would say that a strong dollar would be slightly negative for this company.

GE (33.17) - GE has so many businesses that it’s hard to tell what effect a stronger dollar would have on them. No doubt it would hurt their international operations, but it would probably help somewhere else. Overall, the effect would probably be neutral.

GS (190.24) - I can’t see a strong dollar having any effect on this stock

JOYG (76.90) - This one is hard to figure out. JOYG would get hurt if coal and gold prices went down, but they would be much more at risk if coal prices retreated. However, I think gold prices would be much more at risk if the dollar strengthens. I can also see a scenario where coal prices at worst stay stable if the dollar strengthens. Coal is the cheapest energy source we have and we’re just now getting to the point where a lot of countries that used to be exporters of coal are now importers of coal. I think a strengthening dollar would be a negative for this stock, but I’m not sure how negative.

JWN (37) - A strengthening dollar would most likely be a positive for this stock as it has no international exposure and lower inflation would be seen as a good sign for the economy.

Had to pause here as it was late in the evening. The prices on the following reports are as of 4-29-2008

KO – (58.72) - This is a high quality stock that I plan on owning for a long time. It has the strongest brand name in the world; it pays a great dividend and it has a history of increasing the dividend every year. However, this section is for comments on what effect a strengthening dollar would have on these stocks. So, this one is a hard one to figure out. The majority of KO’s earnings growth has come from overseas in recent years so that part is disturbing. It’s been unclear just how much of an effect rising commodity prices have had on KO’s earnings, so there’s no way to tell if deflating commodity prices would be an advantage for KO. I would say this one is slightly negative.

MCD – (60.20) - MCD is another company whose earnings growth has been largely driven by overseas markets. However, the stock has been hit lately b/c of slowing domestic sales. I actually think a strengthening dollar would be slightly beneficial to this stock b/c it would help domestic sales, which has been the biggest concern, and even though overseas growth would slow, they would still be relatively strong.

MO (20.24) - This stock is now a totally domestic play since they split off the international business.

MSFT (28.64) - I’m sorry to say that I don’t have enough information on this stock to make a determination. It’s a new holding in the portfolio and I just haven’t studied it enough to know it that well.

MT (87.32) - MT is a really tough call. This is a steel company which sounds bad when considering a possible strengthening dollar. However, since the company is headquartered in Luxembourg, the dollar is not their home currency. Add that to the fact that there is a real shortage of steel in the world right now and you have to wonder if steel prices can go a lot lower. This one is hard to call, but I will be cautious and say it’s negative.

NYX (67.85) - NYX is another stock that has benefited from growth in Europe and has benefited from the weak dollar. However, it’s a little bit different b/c this is a stock exchange which really doesn’t have a lot to do with selling a product. If the dollar were to appreciate greatly, then that could be a drag, but I think there are enough negative factors such as our trade deficit and huge budget deficits which will keep the dollar from making a move more than 10% – 15% against other major currencies.

PM (52.01) - This is the international part of the old Altria. A strengthening dollar would hurt this company which would have to be overcome by stronger sales. I believe sales will continue to grow, but future earnings forecasts may have to be trimmed if the dollar strengthens.

PTY (14.73) - This is a closed end fund which owns high yield corporate bonds. I don’t think the dollar has much of an effect on this holding unless it were to cause the companies to default on these bonds.

RTN (64.42) - This is a defense contractor. Although they are starting to get more business from overseas, it has not been a huge benefit so far. I think a strengthening dollar would have a little to no effect on RTN.

USB (34.27) - This is a bank with no overseas exposure. I see no effect based on dollar strength or weakness.

Now that I've detailed all of the stocks I own, I wanted to point out a few stocks that I would buy right now as I do expect the dollar to strengthen in the coming months. Obviously, I want to stay away from companies that get a lot of their business from overseas. I think you can now buy Mastercard MA (273.96) and Visa V (80.88) as they are benefitting from the increased use of credit cards, but they have no credit risk. I also like high quality financial stocks, with an emphasis on the high quality part, such as US Bancorp USB (34.27) and Goldman Sachs (192.68). I also like retailers such as Nordstrom's JWN (38.08) and Polo Ralph Lauren RL (62.39) and tech stocks such as Apple AAPL (175.05) and Google GOOG (558.47). Consider these official recommendations as of today at these closing prices. I would also say it's time to take profits on JOYG at today's closing price of $73.82 and BUCY at $124.06. This locks in a nice profit on my recommendations in just over a month's time. I believe these stocks can go higher, but they will probably go lower first.

Update on recommended trades

I thought it would be good to give an update on the trades I've recommended since starting the blog.

On 1/16/2008 I recommended Annaly Capital Management (NLY) at $18.72. The stock has had a wild ride since my recommendation trading as high as $21.20 and as low as $11.50. I originally liked the stock because I felt it actually benefitted from the subprime mortgage crises. Annaly Capital is actually a REIT that invests in only prime mortgages issued by Freddie Mac and Fannie Mae. Unfortunately, a similar REIT took a hit when they started having liquidity issues of their own. This started speculation that NLY would have to raise capital by issuing more shares. The stock has stabilized recently and I continue to like it although the upside is probably now limited. If you had bought at my recommended price of $18.72, you would now be down 6% with today's closing price of $17.10 and after collecting the 48 cent dividend paid in March.

In early February, I recommended Yahoo (YHOO) for a rare trade. This was shortly after Microsoft offered to buy Yahoo in a package worth approximately $33 per share. So far, there has been no agreement between the two companies. This story has drug out much longer than I originally anticipated and after buying some Yahoo shares myself, I recently sold them and bought Microsoft instead. My reasoning is that I see MSFT being a much better company and I believe their price would go up and Yahoo's price would go down if the deal doesn't happen. If the deal does happen, I believe MSFT's stock will go higher, but it will take longer. Either way, I believe MSFT is the safer play, but I'm stuck with this trade as a recommendation, so let's see how it plays out.

Also in early February, I recommended US Bancorp (USB) at $32.09. I like the stock because they have steered clear of the subprime mortgage crises and I believe they will emerge from this mess a lot stronger than other banks. I also believe thet the aggressive rate cutting by the Fed will help USB's earnings. Since the recommendation, the stock is up 5% with today's closing price of $33.27 when you factor in the 42.5 cent dividend that was paid in March.

I have recommended BE Aerospace (BEAV) twice over the last few months. The average price of my recommendations is $36.08. Today's closing price is $36.03 so it's virtually unchanged. I still really like BEAV. The company is benefiting from increased air travel all across the globe. The main factor that has held the stock back is the continued delay of the Boeing 787. Each time Boeing announces another delay in bringing the new 787 to market, all of the suppliers get hit. Eventually, Boeing will get their act together and the 787 will start being delivered. This should allow BEAV to have fantastic earnings growth over the next several years. If the stock moves down toward $30, I would add to my position.

I recommended General Electric (GE) at $33.11 in early March. The stock initially spiked over $38 per share. Then they disappointed with their earnings announcement and the stock got crushed. I continue to like the stock at current leves, finishing today at $32.46. GE is one of the S&P Dividend Aristocrats which I really like and the stock is currently yielding just under 4%. I think we're getting a great opportunity to buy GE while the yield is at a historically high level. The company is a global leader in several industries and I feel they will get the problems worked out in their financial division which caused the earnings shortfall. I would recommend buying the stock as long as it's in the low 30's.

My last recommendation was on March 26th for Joy Global (JOGY) at $66.21 and Bucyrus International (BUCY) at $117.07. Since the recommendation, both stocks have gone higher with JOYG finishing today at $75.90 and BUCY finishing today at $124.15. I've been lucky with these two stocks continuing to go higher immediately after my recommendation. I still believe that coal will remain in high demand because it's the cheapest energy source in a world that is in big need of energy. This bodes well for the mining equipment stocks and I continue to like both of these stocks. They both announce earnings in the next week, so be on the lookout for the reports.

Alcoa starts off earnings season with a dud...

Alcoa kicked off earnings season after the bell this afternoon and as usual, the company delivered subpar results. Estimates were for the company to make 48 cents per share. However, Alcoa could only manage 44 cents per share blaming higher energy costs and the weak dollar of all things for the shortfall. I have followed Alcoa for quite some time and I continue to be amazed that the company never meets expectations. The CEO had some nice things to say about their outlook going forward, but as always you have to wonder if Alcoa will be able to deliver.

In other news today, Arch Coal (ACI), which was one of the companies in the coal sector that I considered recommending before settling on JOYG and BUCY, said their earnings for 2008 would be between $2 and $2.50 per share. The consensus estimate before the announcement was $2.42. This disappointed the market and caused a broad selloff in the commodities sector. If you read some of the comments I made in response to Michael's comments on the JOYG/BUCY recommendation you will see that I felt these two companies were safer picks because there were so many other factors that came into play with the coal mining companies. I suspect that ACI hedged a bit too much of their 2008 output before coal prices started to rise during the Winter months and was not able to take full advantage. Even though ACI forecasted earnings that may fall well below the concensus estimate, I believe the outlook for the coal industry in general remains strong for the foreseeable future. I would recommend adding to our positions in JOYG and BUCY if the selloff produces a better entry point in those stocks. ACI finished today at $48.22 after hitting an intraday high of $52.64. JOYG traded as high as $71.28 before pulling back to close at $69.14. BUCY traded up to $114.93 before falling to $110.41 at the close.