3 Stocks to Gain on Dollar's Newfound Strength
The U.S. dollar’s newborn strength can be attributed to China’s recovery worries and the lowering of several banks’ credit ratings that led to market turbulence. The dollar’s safe-haven appeal helped the currency to shrug off the current threats and scale upward.
Being mostly U.S.-centric, stocks such as Limbach Holdings, Inc. LMB, Construction Partners, Inc. ROAD and Chuy’s CHUY are in a better position to weather a stronger dollar. These stocks are well protected from the currency translation impact of a stronger greenback.
What’s Driving Dollar?
The ICE U.S. Dollar Index bounced back from the Aug 4 one-week low and advanced to around mid-102.00s. A discouraging set of Chinese trade numbers coupled with Moody’s and Fitch’s downgrade of several U.S. banks dampened investor sentiment but strengthened the dollar predominantly because of its traditional safe-haven status.
China’s economy has started to show signs of distress mostly due to suppressed global demand for commodities. In July, China’s imports and exports dropped way more than anticipated. While the country’s imports tanked by 12.4% from the year-ago period, exports were down by 14.5%.
On the domestic front, multiple U.S. lenders were downgraded by Moody’s. The rating agency lowered the credit ratings of many small to mid-sized U.S. banks and cautioned that these lenders may find it difficult to make money as threats of a recession loom, and interest rates remain high.
At the same time, Fitch has downgraded the U.S. government’s credit rating to AA+ from AAA, thanks to the debt ceiling crisis in Washington. The rating agency did raise apprehensions about the country’s current financial conditions as well.
Recent comments from Fed Governor Michele Bowman on more interest rate hikes boosted the dollar. He said further rate hikes are required as inflation remains elevated. Needless to say, higher rates allure overseas investors looking for higher returns on interest-rate products, and in the process make the dollar stronger.
How a Stronger Dollar Impacts Stocks
A stronger dollar generally hinders the earnings growth of multinational companies. Since these companies generate a bulk of their earnings from overseas, they are exposed to foreign exchange risks. Hence, if the dollar strengthens, it tends to adversely impact the foreign sales of such companies.
On the other hand, smaller companies with wider domestic revenue exposure tend to benefit. These companies are insulated from the negative impact of a stronger dollar.
3 Big Winners
We have picked three such smaller companies that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Such stocks also have a VGM Score of A or B. Here V stands for Value, G for Growth, and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.
Limbach Holdings provides building systems. LMB currently has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its next-year earnings has increased 4.1% over the past 60 days. The company’s expected earnings growth for the current year is 75%.
Construction Partners is an infrastructure and road construction company. ROAD presently has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has increased 20% over the past 60 days. The company’s expected earnings growth for the current year is 104.9%.
Chuy's owns and operates full-service restaurants serving a distinct menu of authentic Mexican food. CHUY has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has moved up 3.4% over the past 60 days. The company’s expected earnings growth rate for the current year is 31.4%.
Shares of Limbach Holdings, Construction Partners and Chuy's have gained 163.7%, 27.2% and 36.1%, respectively, so far this year.
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