By Barbara Kollmeyer, CBS MarketWatch
LOS ANGELES (CBS.MW) -- With all signs pointing in the same direction on the dollar -- due south -- it may be time for investors to buffer their U.S. portfolios with greenback-hardy stocks.
Since the current rout began just over a year ago, the dollar has lost about 14 percent against the euro and 11 percent against the yen, driven by the prevailing opinion that U.S. officials will let the dollar weaken to help alleviate the massive trade deficit.
"We don't try to make large bets in the portfolio relative to the way we think the dollar is going, but my personal view is that a continued modest downtrend in the dollar is likely," said Sean Fitzgibbon, portfolio manager and senior vice-president for The Boston Company Asset Management.
Indeed, Fitzgibbon and other fund managers say they don't aspire to portfolio bets on a weak dollar, but stocks that can hold up against a long-term dollar decline can be a nice addition to a portfolio.
Picking those stocks is another matter.
Traditionally, large U.S. multinationals and consumer staples gain on a weak dollar as their products become cheaper and more competitive abroad. Companies also benefit from the translation effect, such as sales in euros that become bigger when converted into dollars.
But not all of those companies are the safe bet they once were, Fitzgibbon said. "In the past two years while the dollar has gone down, those have been pretty bad investments -- the underlying business fundamentals for a lot of them have deteriorated," he said.
There are other factors at play. Pharmaceuticals, for example, would normally gain from a weaker dollar, but those effects disappear when faced with regulatory changes, pressure on drug prices and expiring patents.
Fitzgibbon cites another example -- Colgate Palmolive /zigman2/quotes/200774077/composite CL +2.05% , which has a large percentage of sales outside of the U.S. "They're now facing increased competition and having to invest more in advertising to battle the competitive threat. So that's taken away all the benefit they get from a weaker dollar," he said.
Multinationals can also accrue a lot of local costs, such as in the case of behemoths like General Electric /zigman2/quotes/208495069/composite GE +1.49% , which is paying for manufacturing and a sales force overseas, said Julie Van Cleave, portfolio manager of the Scudder Capital Growth Fund /zigman2/quotes/201542342/realtime SDGAX -1.33% .
"While some of them really benefit from a weaker dollar, there are also offsets to currency benefits we've seen, such as rising commodity costs, packaging, energy and steel. Those really offset the benefits," Van Cleave said.
Van Cleave likes heavy equipment maker Caterpillar /zigman2/quotes/203434128/composite CAT +4.55% , which has become more competitive with its sales to non-U.S. players via a weaker dollar. The company has had to deal with higher steel prices, and accrued higher shipping and transportation costs due to higher demand. "But because they've been working flat out, they're not maximizing returns. Net, net the dollar is a help for what Caterpillar has is its own supercycle ahead of them."
This supercycle surrounds a long-term underinvestment in mining equipment globally, and Caterpillar is also just breaking into the Chinese market where road building is taking off. "Caterpillar's end markets are very strong, so we're seeing a lot of demand for their products...the currency is just frosting on the cake for Caterpillar."
Fitzgibbon also advises sticking to strong underlying fundamentals and considering currency benefits just that: icing on the cake.
Franklin Resources Investments /zigman2/quotes/201997162/composite BEN +4.84% is one company that fits the bill for him. The manager of international equity and fixed income has 40 percent of assets invested outside the U.S. "They get a huge benefit as the dollar weakens, but those assets outside the U.S. also appreciate relative to the dollar."
Currency aside, Franklin has seen strong inflows into its international area, and a strong performance has helped attract new investments, he said. "The most important criteria is how are their funds performing? A combination of strong performance and asset allocation to the international area has them very well positioned."
Fitzgibbons also likes fast-food giant McDonald's, which has performed better than others multinationals. McDonald's /zigman2/quotes/203508018/composite MCD +1.80% has 65 percent of its sales from outside the United States but has also shown good performances in terms of reasonable comp-store sales, benefiting from an expanded menu.
With currency plays a difficult game, an often-overlooked strategy is for investors to aim for domestic stocks, which have virtually no currency exposure at all, said Larry Puglia, portfolio manager for the T Rowe Price Blue Chip Growth fund /zigman2/quotes/208533233/realtime TRBCX -1.27% .
Home Depot /zigman2/quotes/208081807/composite HD +2.01% is one company that comes to mind for him. The company has reported strong earnings, but shares are in decline, making them fairly cheap, he said. "This is one where you have a domestic franchise and a fairly small percentage of revenues are coming from overseas.
"You're not really going to have a situation where you're going to have results in other currencies that are translated back so you really have currency neutrality of a weaker dollar. That in and of itself can actually tend to help."
Multinationals, Puglia cautions, can run into problems if the dollar really weakens precipitously. "It can raise issues for the U.S. exporter because he's going to have to raise his prices to sort of get back to equilibrium and in doing so, products will become less competitive from a price perspective."
He said United Healthcare /zigman2/quotes/210453738/composite UNH +4.61% also fits the bill of a cheaper stock with strong growth, earnings and cash flow, and a good nondollar play.
An even purer U.S. play without currency risk comes from James Wong, senior vice president and strategist for Payden & Rygel. Vinyard National Bank Corp , a small community bank based in southern California is in the group's Small Cap Leaders Fund.
The bank is seeing "extraordinary loan growth," with exposure only to the local region, he said. "The demographics are favorable and there's tremendous business developing and housing developing occurring in this area."
Wong points out that earnings growth for U.S. companies is still much higher in the small-cap arena, even though these companies may miss out on currency benefits.
"They're good solid businesses and if you picked the right stocks doing well within their niches, you can still do well in the small-cap universe."