Companies generating a big portion of their business abroad have gotten an earnings boost as the dollar's plunge has made overseas profits more valuable. The same can't always be said for the performance of their stocks.
Given all the hype coming from investment pros these days on the virtues of buying shares of U.S. companies with big international operations, it's worth remembering that the returns from those companies have sometimes lagged rivals with smaller or no global presence.
Marc Chandler, Brown Brothers Harriman's chief global currency strategist, sums it up: Don't confuse the dollar with stocks. To him, fundamentals still rule, not currency swings.
As the dollar has tumbled to new lows against the euro and hovered at 26-year lows against the British pound in recent months, Chandler notes that many stock pickers are pushing their clients toward shares in companies with large international exposure.
That view isn't totally out of whack. A sample of companies in the Standard & Poor's 500 index that get more than half their sales from abroad beat earnings-per-share estimates 71 percent of the time during the last quarter. That tops the 64 percent of better-than-expected results coming from totally U.S.-based companies.
But, as Chandler notes, that doesn't mean those companies' stocks outperform those in their sector with smaller international sales.
Big construction equipment-maker Caterpillar Inc., for one, collects more than 50 percent of its revenues overseas, while competitor Deere & Co. derives less than a quarter of sales from its international operations.
Both have seen their earnings benefit from the dollar's weakness in recent months.
Caterpillar's larger global exposure has landed it on many Wall Street firms' stock screens for potential future growth. But investors aren't favoring it, at least not yet, as much as Deere: Caterpillar's stock is up about 21 percent this year, compared with the 24 percent gain in Deere's shares.
There is some idea out there that the weak dollar has some advantage for equities, Chandler said. One cannot deduce the performance of the U.S. stock market, let alone an individual company, on the basis of vagaries of the U.S. dollar.
Of course, there are examples that seem to support that view. American Express Co. has greater exposure abroad and bigger stock gains than rival credit card company Capital One Financial Corp. Coca-Cola Co. also sells more overseas than PepsiCo Inc. - - both stocks are up, but Coke's shares have gained more, even though PepsiCo's most recent earnings grew at a faster pace.
Goldman Sachs, in recommending companies with high foreign sales, emphasizes that investors pay for earnings performance based on fundamentals, and cites Amazon.com Inc. as an example. The Internet retailer's stock price surged 12 percent on April 24 in after-hours trading. It happened at the exact time executives told investors during a post-earnings conference call that strong fundamentals abroad, not currency fluctuations, were responsible for its better-than-expected quarterly results.
That's something to remember amid all the chatter on Wall Street regarding the benefits of the dollar. Chances are, it's not what's really driving stocks.