Investing In A Low-Dollar World

The falling U.S. dollar has become a lightning rod for both investing and political debate. Does the dollar's 16% slide since March represent a litmus test for our nation's policies, or is it a natural side effect of low interest rates and a higher global appetite for risk?

The good news is you don't need to figure that out. Instead, let's focus today on some stocks that will see benefits from a lower dollar, and some that will be hurt and that you might want to avoid. After all, at the end of the day, if you can't change it, you might as well be able to profit from it. (Learn more in Taking Advantage Of A Weak U.S. Dollar.)

Three Stocks that Will Benefit from a Low Dollar
One important thing to remember is to invest in stocks of companies that make things here (the U.S.) and sell overseas. This way production costs are in dollars (cheap), while sales are in foreign currencies (expensive). This gives a boost to revenues and earnings per share on the income statement as those stronger currencies are translated back to dollars.

Some great examples of this rule include Proctor & Gamble (NYSE: PG) and Caterpillar (NYSE: CAT). Both companies generate more than half of their sales overseas, and while they do make goods all over the world, the majority of their costs are in dollars.

Proctor & Gamble sports a price/earnings (P/E) ratio below the average of the broad market, making it a defensive play. Caterpillar is a bit more pricey after the stock's recent rally, but the company has a lot of leverage to an uptick in global demand for construction and mining equipment.

Dollar Down, Commodities Up
Mining is another good way to play a falling dollar. When the dollar falls, the prices of commodities like copper, gold, silver and coal tend to rise in lockstep. This trend has certainly played out in 2009, as gold sits at record nominal highs, while copper and other metals have risen more than 100% from their lows.

Another important low-dollar investing rule is to invest in commodity-related stocks, funds and ETFs – good examples include Freeport-McMoRan (NYSE: FCX) and Newmont Mining Corp. (NYSE: NEM). These companies are among the world's largest producers of gold and copper, and the earnings these firms generate will rise along with the market price of the metals they produce. (Learn more in Commodity Prices And Currency Movements.)

Don'ts for a Low-Dollar World
The corollary of the exporters that will benefit are importers to the U.S. that will be crimped by the low dollar. A company like Sony (NYSE: SNE) that produces most of its goods in Asia and sells them in the U.S. will see the reverse effect of a Proctor & Gamble, hurting company sales and earnings. The same goes for auto maker Toyota Motor Corp. (NYSE: TM), which is being hurt not only by the dollar but also by slumping global auto sales as well.

Exporters to the U.S. are forced to raise prices in order to maintain profit margins, and in this weak economy, consumers simply won't pay up when they don't have to. Sony, for example, recently reported a net loss of ¥26 billion, and noted that the company took a ¥77 billion hit from yen appreciation alone!

Parting Thoughts
The low-dollar theme is alive and well right now, but investors should be cautioned to not get too caught up in the trend. Don't invest in something just because of the low-dollar angle, as the currency could change course quickly, and if it does, stocks & funds that don't have strong underlying fundamentals could see savvy investors selling then en masse. So look for companies that have good outlooks on their own, and use the falling dollar as a "kicker" to an already good investing thesis. (For background on currencies, read our Forex Currencies Tutorial.)