The Math Adds Up: Buy American

07/18/2012 5:04 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Pure US plays are better positioned to profit on the fact that the US dollar and economy are strengthening nearly alone among developed nations, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

I don’t think this is a case of putting 2 and 2 together and getting 5. I think the math really does come out to 4.

Looking at the second-quarter earnings reports we’ve seen so far from the likes of Coca-Cola (KO) and Johnson & Johnson (JNJ), and putting those together with this morning’s very positive report on the US housing sector, I can’t help but think that I’d like to have more exposure to the US domestic economy and less exposure to Europe.

It’s not just because European revenue growth looks just about non-existent this quarter, which it does. But also because the strong dollar is killing company earnings at US companies when revenue in currencies such as the euro is translated back into dollars.

So, for example, Coca-Cola reported a decline in earnings in the second quarter—to $1.21 a share, from $1.20 a share in the second quarter of 2011—as revenue grew by a meager 3%. According to the company, the strong dollar knocked four percentage points off Coke’s revenue growth during the quarter. And in the third quarter, Coke said, the strong dollar would present the company with an 8% to 9% revenue headwind.

The story at Johnson & Johnson was pretty much the same. Earnings in the quarter fell 49.3% from the second quarter of 2011. Most of that drop was due to things like the costs of closing the acquisition of Synthes, a medical device company, and $600 million to settle a lawsuit over allegations of bribery and improper marketing of several drugs.

But Johnson & Johnson also saw revenue decline by 0.7% from the second quarter of 2011 on the effect of a stronger US dollar. For all of 2012, the company cut its earnings guidance to $5 to $5.07 a share, and again cited the effects of a stronger US currency.

Contrast that drag on earnings to the lack of a currency drag and the improving domestic prospects of the US homebuilders, as revealed in this morning’s report of a 6.9% increase in May housing starts.

The conclusion I’d draw is that for this earnings season—and indeed, if we believe company guidance, for the rest of 2012—purely domestic US companies are better positioned to deliver revenue and earnings growth than US multinationals such as Coke, PepsiCo (PEP), McDonald’s (MCD), and IBM (IBM).

A list of domestic US companies to look at for this quarter and the rest of 2012 would include—besides US homebuilders such as Lennar (LEN) and Toll Brothers (TOL)—Lowe’s (LOW), Lumber Liquidators (LL), Dollar General (DG), and Cracker Barrel (CBRL). Contrast Coke, which gets 56% of its sales from outside North America, with Dollar General, which has 10,000 stores in 39 states.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of McDonald’s as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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