In this article, we discuss 10 stocks that the strong dollar is crushing. If you want to see more stocks in this selection, check out Strong Dollar is Crushing These 5 Stocks.
One of the biggest challenges presented to corporate America this earnings season was a strong dollar. Many prominent market leaders and multinationals with operations worldwide lamented the fact that foreign currency exchange rates cut into their profits and revenues. Some of the significant victims of a strong dollar included Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG).
Companies slashed their guidance for the second half of 2022 and beyond as the strengthening dollar wiped billions from US corporate earnings, and the situation does not seem to be improving moving ahead. Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management, observed in late-June that the biggest market leaders were under scrutiny since they have global operations and a sizeable chunk of their revenues is attributed to international sales. Roughly 35% of US companies have large enough international exposure that a stronger dollar significantly impacts their earnings per share, noted Gina Martin Adams, director of equity strategy at Bloomberg Intelligence.
The US currency has climbed to its highest level in 20 years, and paired with high inflation and rising rates, the impact on business and consumer demand is starkly visible. Max Kettner, a strategist at HSBC, told Financial Times on July 25 that even if the dollar stopped rising further now, the currency’s strength in the last 12 months will still lead to slashed earnings estimates solely due to foreign exchange headwinds.
We reviewed the Q2 2022 earnings reports for companies that have sizeable operations overseas and looked for management’s comments regarding foreign exchange headwinds impacting the business. We selected the 10 most prominent companies that were affected by a strong dollar for this list. The companies are ranked according to the hedge fund sentiment as of Q1 2022, which was gauged from Insider Monkey’s database that tracks more than 900 elite hedge funds.
Strong Dollar is Crushing These Stocks
10. Digital Realty Trust, Inc. (NYSE:DLR)
Number of Hedge Fund Holders: 31
Digital Realty Trust, Inc. (NYSE:DLR) is an American real estate investment trust that invests in data centers, colocation, and interconnection solutions. The REIT rents out its properties to top businesses and service providers. On July 28, Digital Realty Trust, Inc. (NYSE:DLR) reported its Q2 results, announcing an FFO of $1.72, exceeding market estimates by $0.07. The revenue of $1.1 billion gained only 0.90% year over year and missed Street consensus by $50 million. The REIT also slashed its 2022 guidance to factor in the strength of the U.S. dollar.
The new 2022 guidance for core FFO per share now stands at $6.75 to $6.85, compared to a consensus estimate of $6.82 and the earlier range of $6.80 to $6.90. Digital Realty Trust, Inc. (NYSE:DLR) expects a full-year revenue of $4.65 billion to $4.75 billion, versus a Street consensus of $4.73 billion and the prior guidance of $4.70 billion to $4.80 billion.
On August 2, Deutsche Bank analyst Matthew Niknam raised the price target on Digital Realty Trust, Inc. (NYSE:DLR) to $150 from $144 and maintained a Buy rating on the shares after the Q2 results.
Among the hedge funds tracked by Insider Monkey, Mark Wolfson and Jamie Alexander’s Jasper Ridge Partners is one of the leading stakeholders of Digital Realty Trust, Inc. (NYSE:DLR) as of Q1 2022, with 652,448 shares worth $92.5 million. Overall, 31 hedge funds were bullish on the stock at the end of Q1 2022, up from 26 funds in the preceding quarter.
Digital Realty Trust, Inc. (NYSE:DLR) has lately been impacted by a strong dollar, just like Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG).
9. Aflac Incorporated (NYSE:AFL)
Number of Hedge Fund Holders: 32
Aflac Incorporated (NYSE:AFL) is a Georgia-based provider of supplemental health and life insurance products. The company operates through two segments – Aflac Japan and Aflac U.S. On August 1, Aflac Incorporated (NYSE:AFL) posted a Q2 non-GAAP EPS of $1.46, beating market estimates by $0.18. The revenue of $5.4 billion dropped about 3% on a year over year basis but exceeded Wall Street consensus by $610 million. The company also declared a $0.40 per share quarterly dividend, which is payable on September 1 to shareholders of record as of August 24. The forward yield was 2.82%. The company reiterated on August 1 that sales in its Japan division were under pressure due to a softer yen. The weaker yen/dollar conversion rate chipped away at the EPS by $0.09 in Q2 2022.
On July 11, JPMorgan analyst Jimmy Bhullar raised the price target on Aflac Incorporated (NYSE:AFL) to $62 from $61 and maintained a Neutral rating on the shares. The analyst sees the risk/reward in the life insurance sector as "less compelling than previously". The sector is a primary beneficiary of rising rates and falling COVID cases, but short-term results will be soft, said the analyst, who is worried about downside risk to market estimates. The weak stock market will likely challenge earnings and slash capital ratios for some insurers, and this will limit flexibility, the analyst wrote.
According to Insider Monkey’s data, 32 hedge funds were bullish on Aflac Incorporated (NYSE:AFL) at the end of the first quarter of 2022, compared to 31 funds in the prior quarter. John W. Rogers’ Ariel Investments is the leading stakeholder of the company, with 1.26 million shares worth $81.60 million.
Here is what Madison Funds has to say about Aflac Incorporated (NYSE:AFL) in its Q2 2021 investor letter:
“This quarter we are highlighting Aflac (AFL) as a relative yield example in the Financial sector. AFL is a leading provider of life and supplemental medical insurance in Japan and the U.S. AFL products offer financial protection against loss of income for policyholders based on qualifying health events. Aflac Japan generates approximately 70% of total revenues, and the company has dominant market share in Japan. In the U.S., AFL provides voluntary insurance for policyholders at businesses with products sold through payroll deduction by its large sales force which sells primarily through face-to-face interactions. We believe AFL’s dominant market position in Japan and its large U.S. sales force create a sustainable competitive advantage for the company.
Our thesis on AFL is that its sales will recover from the impact of the COVID pandemic, and it will return a significant amount of capital to shareholders. Sales were negatively impacted in both Japan and the U.S. but appear to be in early stages of recovering. We believe sales will improve further as economies open and new products are introduced in Japan. In the U.S., agents will be able to return to face-to-face interactions as people get vaccinated, something that was restricted last year.
In terms of capital returns, AFL committed to returning $8-9 billion between 2020-2022, which is expected to be 75% of operating earnings. The company returns capital via share buybacks and dividend increases. AFL is a Dividend Aristocrat that has increased its dividend 39 years in a row including 10% annually over the last five years; it also recently announced an 18% dividend increase. Other favorable attributes include an A- rated balance sheet by Standard and Poor’s and an attractive valuation with a relative yield near the high end of its historical range.
We believe its valuation is cheap with its forward expected Price/Earnings (P/E) ratio just 9x and a relative P/E of 0.4x versus the S&P 500 despite an industry leading return on equity. At the time of purchase, AFL had a dividend yield of 2.5% and its relative dividend yield vs. the S&P 500 was 1.8x, as shown. Some risks to the thesis include a prolonged economic downturn, loss of market share due to unsuccessful new product rollouts and potential losses in its investment portfolio.”
8. International Business Machines Corporation (NYSE:IBM)
Number of Hedge Fund Holders: 43
International Business Machines Corporation (NYSE:IBM) is an American multinational provider of integrated technology solutions worldwide. The company operates through four business segments – Software, Consulting, Infrastructure, and Financing. On July 18, International Business Machines Corporation (NYSE:IBM) stock plunged by 4% as the company reiterated its outlook for the rest of 2022, saying it is going to be affected by the strengthening U.S. dollar and the company concluding its business in Russia. The company’s CFO said that the "significant movement" in the U.S. dollar led to a "6-point headwind to revenue growth". However, for the third quarter and the entire fiscal year, the company forecasts constant currency revenue growth to be at the high end of the mid-single digit estimates.
On July 20, Credit Suisse analyst Sami Badri lowered the price target on International Business Machines Corporation (NYSE:IBM) to $156 from $166 and kept an Outperform rating on the shares after the Q2 results. The analyst still views International Business Machines Corporation (NYSE:IBM) as a notable facilitator of hybrid cloud architectures and one of the primary strategic enablers of a digital transformation.
According to Insider Monkey’s data, 43 hedge funds were bullish on International Business Machines Corporation (NYSE:IBM) at the end of Q1 2022, compared to 44 funds in the last quarter. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital is the leading stakeholder of the company, with 4.46 million shares worth about $580 million.
“IBM was not the first company to build computers. The distinction belongs to Sperry-Rand’s subsidiary UNIVAC, which introduced the first commercially successful computers in the early 1950s. In this era, IBM did possess the largest research and development department of the business machines industry and quickly caught up, introducing cost-competitive computers a few years after UNIVAC. By the late 1950s, IBM held the dominant market share in computers. IBM also touted a vastly superior sales organization, which used a sales tactic called “paper machines” (the equivalent of today’s “vaporware”). If a competitor’s product was selling well in a market segment that IBM had yet to penetrate, the company would announce a competing product and start taking orders for the “paper machine” long before it was available.
One cannot overstate how powerful IBM was in the computer industry in the 1950s and 1960s. Every competitor rightly worried that if their product worked too well for too long, it was only a matter of time before an army of IBM salesforce representatives mobilized. In their easily recognizable uniforms of starched white shirts, red ties and blue suits, IBM marketers marched on their customers and offered a more expensive, but much more defensible, choice. “Nobody gets fired for buying IBM” was a common phrase. Even competitors acknowledged that the company excelled at sales. As a UNIVAC executive once complained, ‘It doesn’t do much good to build a better mousetrap if the other guy selling mousetraps has five times as many salesmen.’” (Click here to see the full text)
7. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 67
NIKE, Inc. (NYSE:NKE), the American multinational retailer of athletic footwear and apparel, is another company that was crushed by a strong dollar. Rising inflation and foreign exchange headwinds impacted results negatively as gross margin declined by 80 basis points to 45% amid increasing freight and logistics costs, while a stronger dollar led to a 4% gap between constant currency sales and the numbers reported. The rampant costs were largely problematic in the greater China region since they added to “higher inventory obsolescence” in the second quarter.
Piper Sandler analyst Abbie Zvejnieks on July 25 initiated coverage of NIKE, Inc. (NYSE:NKE) with a Neutral rating and a $115 price target. NIKE, Inc. (NYSE:NKE)’s gross margins have improved but headwinds in China could be an issue, since it is NIKE, Inc. (NYSE:NKE)’s highest margin region, the analyst told investors. Macro challenges in China, such as pandemic-driven lockdowns and nationalism trends, and uncertain consumer backdrops in the United States and Europe "leave us sidelined," added the analyst.
Among the hedge funds tracked by Insider Monkey, 67 funds were long NIKE, Inc. (NYSE:NKE) at the end of Q1 2022, compared to 68 funds in the last quarter. Ken Fisher’s Fisher Asset Management is the biggest stakeholder of the company, with 8.2 million shares worth $1.11 billion.
Here is what ClearBridge All Cap Growth Strategy has to say about NIKE, Inc. (NYSE:NKE) in its Q4 2021 investor letter:
“Nike is another play on e-commerce as well as the anticipated growth in consumer spending as we learn to live with COVID-19. After selling out of the stock in 2016 due to competitive concerns, we were motivated to repurchase shares because of optimism around a new management team’s focus on accelerating Nike’s shift toward e-commerce and direct-to-consumer (DTC) distribution. Near-term supply chain issues in Vietnam and retail weakness in China that we see as ephemeral provided a good buying opportunity. We do not believe the market is giving proper credit to Nike’s potential to deliver attractive, high-single-digit revenue growth while delivering operating margin expansion as more merchandise is sold directly. Nike is also still under indexed to the women’s category, which we see as a significant ongoing catalyst.”
6. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
Johnson & Johnson (NYSE:JNJ) is an American multinational healthcare firm. On July 19, the company slashed guidance despite its above consensus Q2 results. Johnson & Johnson (NYSE:JNJ) cited the strong dollar and unfeasible foreign exchange movements lowering the company’s margins. The company’s CFO observed that the U.S. dollar has reached the same level as the euro, which is "something we haven't seen in 20 years". He reiterated that if the dollar were to pull back, Johnson & Johnson (NYSE:JNJ) would revise its guidance accordingly.
On July 21, UBS analyst Kevin Caliendo lowered the price target on Johnson & Johnson (NYSE:JNJ) to $180 from $185 and reaffirmed a Neutral rating on the shares. The company's Q2 results were indicative of the turbulent macro environment, which includes the significant swing in currency, rampant inflation, and slow elective procedure recovery, the analyst informed investors.
According to Insider Monkey’s database, Johnson & Johnson (NYSE:JNJ) was part of 83 hedge fund portfolios at the end of Q1 2022, with collective stakes worth $7.40 billion. Rajiv Jain’s GQG Partners is the largest stakeholder of the company, with 6.50 million shares valued at $1.15 billion.
In addition to Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), a strong dollar hurt Johnson & Johnson (NYSE:JNJ)’s Q2 results.
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Disclosure: None. Strong Dollar is Crushing These 10 Stocks is originally published on Insider Monkey.