Dollar's loss can be your gain

Analysis |

The dollar continues to slide against other major currencies, but its weakness may actually boost some companies' profits, analysts say.

A 10 percent decline in the dollar adds 1.5 percentage points to the earnings growth of companies in the S&P 500 stock index, according to Morgan Stanley analyst William M. Smith. That's because companies with overseas sales benefit when the euros and pounds used to buy their goods are translated back to dollars.

Coca-Cola, reporting its financial results Tuesday, said currency gains accounted for 3 percentage points of its 19 percent growth in second-quarter revenue. Coca-Cola is among companies with high foreign sales, most of them very large companies.

Wall Street has already baked in higher earnings expectations for globally focused companies: Among the 100 largest U.S. companies, those with more than 25 percent of sales overseas are expected to report 7.3 percent growth in second-quarter profit, Smith says. Analysts expect those with less than 25 percent in foreign sales to report 4.4 percent earnings growth.

But some say the best way to play the weak dollar is to invest directly in foreign stocks. "It's not a benefit to earn more dollars if the dollars have less value," says Peter Schiff, president of Euro Pacific Capital, which specializes in international securities.

He has been advising clients to invest exclusively abroad for the past 10 years, and sees the dollar dropping as much as 50 percent over the next few years. Most of his holdings are in Asia, Europe and Canada, though he owns a few U.S.-based commodity plays, such as oil producers and miners.