The surging dollar has been one of the most pervasive themes in quarterly earnings reports for a year now. Companies have taken a hit in each quarter when translating their foreign sales from weakening currencies into dollars. 

It doesn’t look like that trend is going to be broken in the third quarter.

Of the 24 companies in the S&P 500 that had reported earnings by October 9, 18 of them cited the stronger dollar as a negative impact on earnings or sales. This was more than all the other reasons for negative earnings impacts combined according to FactSet Research. 

As bad as the negative impact has been on U.S. companies with overseas business, the positive impact from a surprise weakening of the dollar may be all the market needs to make new highs. 

We may not have to wait long for that surprise turnaround in the dollar — and I’ve found two companies that will benefit more than most.

Why The Dollar Isn’t As Strong As You Think

After an historic surge from July of last year through March, the dollar has remained relatively flat against a basket of currencies for most of this year. David Bloom, Chief Currency Strategist for HSBC, argued earlier this year that the dollar’s rally had already run its course and had climbed beyond the gains in previous cycles. 

Economic growth in the United States seems to have stagnated with full-year estimates around 2.5%, just a tenth of a percent more than last year. Europe’s economy is finally showing signs of life with growth accelerating to 1.4% and China is still pumping out an enviable 6.8% pace.

An imminent increase in interest rates has been blamed for some of the dollar strength but may be a matter of buy-the-rumor, sell-the-fact. The Fed has promised an extremely moderated increase in rates and dollar sentiment could fall apart once investors realize this reality. All it will take is for a few other central banks to start talking about higher rates and investors will rush out of dollars.

Who Wins With A Weak Dollar

While the 500 companies in the S&P report an average of 48% of sales from overseas, companies in information technology and energy report 59% and 56% of sales from foreign buyers. This could mean the sectors will benefit disproportionately when the dollar’s fortune changes. 

Apple (Nasdaq: AAPL) books just 36% of its sales within the Americas, some of which are outside the United States. The company booked a loss on income of $137 million on foreign currency translation in its fiscal 2014 report. Management noted during the 3Q earnings call in July that the stronger dollar impacted gross margin and sales even though sales held up remarkably well. 

Shares of Apple have fallen lately and are back to an attractive valuation of 12.9 times trailing earnings. Despite a stronger dollar making most U.S. products more expensive on the international market, Apple has actually been able to raise its iPhone prices. Those price increases are going to add to the bottom-line big time if the dollar starts to weaken.

Looking beyond the tech industry, Exxon Mobil (NYSE: XOM) booked 55% of last year’s petroleum product sales outside the United States, primarily from Asia and Europe. Foreign exchange translation hit earnings by $5.1 billion and caused a $261 million write-down on asset valuation. Not only will Exxon benefit from a weaker dollar through currency translation but through higher oil prices as well. 

Shares have rebounded recently with the rally in oil prices but are still down 15% for the year and trade for 14.6 times trailing earnings. On the price weakness, Exxon’s dividend yield has climbed to 3.8% and a relative yield of 1.8 times the yield on the S&P 500. Recent analysis by Barclay’s found that, over the last 25 years, when Exxon’s relative yield climbed above 1.7 times that of the S&P, the shares outperformed the market by an average of 6.8% over the next year.

Risks To Consider: A weaker dollar will boost income from foreign sales but is only one factor for stocks. Watch for higher sales and margins besides the boost from foreign currency translation.

Action To Take: Take advantage of potential dollar weakness and upside in stocks with a large portion of sales overseas like Apple and Exxon Mobil.

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