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Stock Winners, if You Know Where to Look

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Thursday, July 23, 2015
Money and Markets
Stock Winners, if You Know Where to Look
by Mike Burnick

Dear ,

Mike Burnick

Last week in Money and Markets, I reported that profit-growth expectations are not-so-great heading into second-quarter earnings season (see: Here's What to Focus on for Earnings Season). That's certainly been the case so far with disappointments this week from blue-chips like United Technologies (UTX), International Business Machines (IBM) and Apple (AAPL).

Still, there are certain sectors and stocks that should emerge as big winners if you know where to look. And the same is true from a geographical perspective because select international markets have much stronger profit growth prospects than U.S. stocks right now, as I'll explain.

First, let's take a closer look at the early results from Wall Street.

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After two weeks of earnings results it's still too soon to be certain, but S&P 500 earnings growth is tracking -4.6% over the same period last year, according to Merrill Lynch research, with top line sales down 3.7% year over year.

Still, only 25% of S&P 500 companies have reported so far. And more than 60% of them have beaten profit forecasts, which is typical, but not enough to keep quarterly profits from declining overall.

Strong dollar a headwind for S&P 500

Already a clear trend has emerged this earnings season: U.S. stocks and sectors that do big business overseas are suffering from the strong dollar. IBM admitted as much in its report earlier this week. Big-blue's top line sales fell 9% due to the strong dollar alone, and IBM is not alone.

Remember, the dollar has been on an upside tear over the past year, moving higher against most major currencies and emerging market currencies alike.

For instance, the euro has plunged by 20% against the buck over the past year. This time last year, it cost $1.37 to buy one euro. Now, it costs just $1.09 to buy a euro!

In fact, I was able to profit from the exchange-rate shift in more ways than one on my trip to Italy and Greece last month. Another glass of wine with dinner ... no problem!

But what has been a boon for American tourists is a bust for American companies with big international sales.

Biggest losers: U.S. stocks with big international sales

Nearly half of S&P 500 sales come from outside the U.S. — 47.8% to be exact — that's up from just 43.8% 10 years ago. And European sales account for 7.5% of total S&P 500 sales, up from 6.8% last year.

The technology sector has the most to lose from the exchange-rate shift, with 59.4% foreign sales, as IBM can attest. Energy, basic materials and industrial stocks are also facing stiff headwinds from a stronger buck, which will certainly put a dent in sales and profits results this quarter.

Sure enough, some of the steepest earnings revisions have come from sectors with the most international sales. Profits for industrial stocks are expected to drop 4.3% year over year. Materials and health care stocks are also experiencing big downward revisions in their earnings estimates.

Health care and tech stocks in Europe that do big business internationally are expected to post stellar results.

But if the strong dollar is a headwind for many U.S. stocks, it must also be a very positive tailwind boosting the results of European stocks.

Biggest winners: European stocks with big U.S. sales

In fact, the same sectors that are suffering from dollar strength here at home are cashing in on the weaker euro. Industrial, health care and technology stocks in Europe that do big business internationally are expected to post stellar second-quarter profit results.

Instead of United Technologies, which disappointed on Tuesday, think Airbus. Rather than U.S. drug maker Merck, you may want to take a closer look at France's Sanofi.

And on the same day IBM disappointed investors by missing estimates, German software giant SAP reported a 20% jump in quarterly sales thanks to, you guessed it, a weak euro.

Click for larger version

European stocks listed in the Euro Stoxx 50 Index should post 12% year over year profit growth in 2015 (see chart above), compared with just 1% earnings growth for S&P 500 companies this year!

Plus, many European stocks are cheap right now, thanks to the discount provided by the recent Greek debt drama.

Highly-rated European stocks in the hottest sectors

Companies in the Euro Stoxx 50 Index trade at just 14.7 times earnings, compared to a P/E ratio of 16.8 for S&P 500 stocks. And European stocks have been outperforming U.S. stocks with the Euro Stoxx 50 up 18% year to date, compared to a gain of just 3% for the S&P!

Here's a good source for further research: Our Weiss Stock Ratings Heat Maps.

One of the many lists of top-rated stocks we publish daily is our Best International Stocks. On the list this week is Irish discount airline Ryanair (RYAAY – Weiss Rating: A-), a big beneficiary of lower fuel prices AND a weaker euro that is boosting tourism.

Another stock on our top-rated International list is Swiss drug maker Novartis (NVS – Weiss Rating: A-) which is also in one of the best performing stock market sectors this year.

Bottom line: If you follow the trend in global earnings, it's pointing to better opportunities in select international markets, particularly in Europe where a cheaper euro is boosting profits, in spite of the negative headlines from the region.

Good investing,

Mike Burnick

The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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