In yesterdayâ€™s column, I warned about the real and increasing threat of the euroâ€™s weakness sapping corporate profitability and the share prices of companies with significant sales overseas.
Youâ€™ll recall, the technology and materials sectors are particularly vulnerable. On average, companies in each sector book more than 52% of sales overseas. That means the impact of foreign currency translation losses promises to be more pronounced in these two sectors.
And if we focus on a certain subset of these stocks, weâ€™re all but guaranteed to sidestep the currency crisis risk.
Let me explain howâ€¦
Two Sectors That Couldnâ€™t Care Less About the Euro
Both the financials and telecom sectors are virtually immune to the crumbling euro.Â How so?
Because the average company in each sector books the majority of sales in the United States.
According to Bespoke Investment Group, the average financial company books 85% of sales domestically, while the average telecom company books 96% in the United States. So even if the euro crumbles, the impact on overall profitability for these companies promises to be muted.
That being said, any old financial or telecom stock wonâ€™t cut it. We need to be much more selective.
You see, first-quarter earnings werenâ€™t exactly robust.
In other words, the average U.S. stock isnâ€™t as fundamentally strong as itâ€™s been in recent quarters. And while a rising tide might lift all boats, it wonâ€™t do so indefinitely.
Eventually, companies are going to have to trade on the merit of their underlying fundamentals.
So, if we really want to insulate our portfolios from the euro crisis, we need to go beyond focusing on companies with almost 100% of sales in the United States. We also need to focus on companies with the strongest fundamentals. Specifically, triple plays â€“ ones that beat both earnings and sales estimates and also raised guidance in the last quarter.
â€śTypically less than 5% of stocks during any given earnings season will report triple plays,â€ť says Bespoke Investment Group. So what weâ€™re really talking about is only investing in a select group of stocks with the strongest fundamentals.
When it comes to the telecom sector, Crown Castle International (NYSE: CCI) and TW Telecom (Nasdaq: TWTC) represent attractive options.
Crown is one of the largest independent operators of wireless towers in the United States. Given the exploding use of mobile devices, demand for its services promises to be robust well into the future.
And TW Telecom (formerly Time Warner Telecom) provides phone, data transport and internet access services to more than 27,000 customers â€“ including businesses and government entities â€“ throughout the United States.
As for the financials sector, Iâ€™d consider investing in Tower Group (Nasdaq: TWGP) and DFC Global (Nasdaq: DLLR).
Tower provides specialty program commercial property and casualty insurance, including workersâ€™ compensation, medical malpractice and other niche liability coverage. It sports a respectable 3.8% dividend yield and trades for just seven times forward earnings.
And DFC Global provides check cashing, payday lending, money wires and transfers, utility bill payments and prepaid telephone services at more than 1,250 locations in the United States. Shares are also a bargain, trading for 6.7 times forward earnings.
Bottom line: Given the seemingly endless currency crisis in Europe, we should avoid U.S. companies with significant overseas sales. Instead, we should embrace companies with little to no overseas exposure and strong fundamentals to boot.
Ahead of the tape,
Source: Wall Street Daily