A big constant for most of 2015 may be about to change: The strong dollar could become weaker.
A hearty thank you to the kind folks at the Federal Reserve for raising the possibility of this happening. Last week, the Fed did a couple of things besides give us all something to discuss over the weekend.
First, it said, in not so many words, the U.S. economy stinks right now. Not only does the U.S. economy stink, but there are risks of it becoming worse during the holidays due to a host of concerns, particularly volatile financial markets (so reckless they mentioned this, by the way). Second, as a result of a stalled economic engine, interest rates are unlikely going to be lifted this year.
In the process of sharing these musings, the Fed reversed the underpinning for the dollar's resilience (driven by prospects of rate hikes this year) that has served to wallop the earnings and outlooks of multinationals year to date.
If the dollar starts to weaken, as it showed signs of doing in the wake of the Fed's decision (see chart below), and global growth stays as is, the Fed will likely have caused the following amongst corporate America:
1. Less gloom on earnings calls by CFOs next month with regard to the influence of the dollar
2. The potential for fourth-quarter earnings beats as estimates will have been taken down too much earlier this year.
3. Reduced volatility in the financial markets of emerging markets, raising the specter for multinationals to resume more solid growth soon.
U.S. Dollar Index
That said, just because the dollar could embark on a short-term bout of weakness doesn't mean going out and buying every company that sources 50% of its sales from Europe and China. For example, I still think heavy equipment companies such as Caterpillar (CAT) will have a hard time meeting its financial targets this year regardless of renewed dollar weakness.
So, instead, I would consolidate efforts on finding weak dollar plays on consumer goods multinationals that sell snacks and treats all over the globe. Small ticket items that are akin to daily essentials. The best name on my list continues to be food and beverage giant PepsiCo (PEP).
I am fresh off spending a full day at PepsiCo's updated New York headquarters for TheStreet. Beyond an informative day walking its test kitchens and talking to Vice Chairman and Chief Scientific Officer Dr. Mehmood Khan, there are several things I came away with that serve as grounds for a reiteration of my bullishness on the stock, especially should the dollar weaken:
1. The organization is on an innovation hot streak, developing products that cater to new consumer needs for convenience and health consciousness. I am not seeing these same types of efforts from the company's chief competitor Coca-Cola (KO) or secondary competitors (and Action Alerts PLUS holdings Mondelez International (MDLZ) or Kraft Heinz (KHC)). Therefore, I believe PEP deserves to trade at a higher multiple relative to its peer group:
2. The mindset inside the company has fundamentally changed. Walls between operating units have been kicked down, the idea-sharing is flowing and leading to successful new products.
3. PepsiCo's Quaker Oats, which has been struggling, could be about to deliver much stronger sales and products within the next 12 mounts due to a host of new products focused on convenience and health. In my view, Wall Street is not modeling for a rebound in the fortunes of Quaker Oats.
4. PepsiCo is one of the few multinationals that "gets it" in emerging markets. For this company, it's not about taking products from the U.S. and exporting them to emerging markets. Rather, the thinking is to develop products to fit local needs, which raises the potential for profitable sales.
5. The soda business is what it is at this point, meaning slow growth. But I get the sense it's being managed very effectively toward maximizing productivity.