Investing

Merrill Lynch's 5 Stocks to Buy for a Stronger Dollar

Lee Jackson

Published: January 13, 2017 8:25 am

Last Updated: January 12, 2020 3:53 pm

In some cases, with the U.S. dollar as the world’s leading reserve currency, the strong dollar is a positive. But there is one group that the strong dollar hurts, and that’s companies with a large amount of overseas product or service sales. For investors that own stock in these companies, a couple of quarters of a red-hot greenback can push earnings lower, and that in turn can weigh on share prices.

So what are investors to do? One good idea is to look for companies that primarily do business here in the United States. The lack of exports is a positive, and the potential for tax cuts and a strengthening economy can also add fuel to the domestic fire.

With the S&P 500 deriving 40% of total profit abroad, and 50% when you back out the financials, it makes sense for investors to buy stock in companies with the bulk of the profit coming from their U.S. business, especially with the dollar getting stronger almost daily. We screened the Merrill Lynch research database for stocks rated Buy that do the bulk of their business in the United States.

AT&T

This company has had an incredible run this year but is off over 5% in 2017 trading. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.

With its shares trading at a very cheap 14.3 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.

AT&T is in the Merrill Lynch US 1 portfolio and has several major catalysts likely to drive strong network traffic demand: DirecTV Now and Mobile, “Data-Free TV” for DirecTV/U-Verse subscribers and increasing penetration of unlimited data plans. Many on Wall Street believe that the company is well-positioned to address ongoing traffic requirements, with additional LTE capacity available and the ability to leverage small cell deployments.

Other top Wall Street analysts have cited the company’s positive commentary on free cash flow and improving video/broadband trends later this year, with single truck-roll and new converged offerings expected to be coming next month.

AT&T investors receive a 4.8% dividend. The Merrill Lynch price objective for the stock is $46. Wall Street’s consensus price target is $41.48. Shares closed Thursday at $41.01.

American Electric Power

This industry leader is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.

Many on Wall Street feel that the stock trades at a discount to its utility peers and they feel it deserves a premium. The analysts note the company has a less volatile earnings stream, and they see the potential for earnings upside due to changes in legislation in Ohio. Also trading at a discount to peers could lead to a premium valuation.

AEP shareholders receive a 3.7% dividend. Merrill Lynch has a $63 price objective. The consensus target is $67.19. Shares closed on Thursday at $63.29.

Lowe’s

Many on Wall Street feel this company deserves a premium multiple to its peers, and it is also on the Merrill Lynch US 1 list. Lowe’s Companies Inc. (NYSE: LOW) operates as a home improvement retailer, offering products for maintenance, repair, remodeling and home decorating.

Categories include kitchens and appliances; lumber and building materials; tools and hardware; fashion fixtures; rough plumbing and electrical; lawn and garden; seasonal living; paint; home fashions; storage and cleaning; flooring; millwork; and outdoor power equipment. The company also offers installation services through independent contractors in various product categories.

The stock was hit hard during the past quarter, and the analysts at Merrill Lynch note that it is trading at a price-to-earnings discount to its rival Home Depot, as well as trading below its five-year and 10-year P/E averages. With earnings expected to grow at an 18% compounded annual growth rate through 2018, adding shares at current levels makes sense.

Lowe’s investors receive a 1.9% dividend. The $89 Merrill Lynch price objective compares with the consensus target of $79.71. Shares closed Thursday at $71.58.

Southwest Airlines

This company continues to expand routes and remains a low-cost leader. It is also one of the top picks across Wall Street. Southwest Airlines Inc. (NYSE: LUV) continues to increase the footprint and brand awareness all over the country. With the domestic market showing reasonably good strength, and the pricing environment looking very solid for the rest of 2016 and through next year, revenues should stay strong and continue to grow.

Jet fuel prices, which still remain much lower than in past years, are almost 30% of Southwest’s total costs, have been a key for improving revenues and earnings. With almost no international business at this time, currency headwinds are not an issue for the airline.

Based on the U.S. Department of Transportation’s most recent data, Southwest Airlines is the nation’s largest carrier in terms of originating domestic passengers boarded. The company operates the largest fleet of Boeing aircraft in the world, the majority of which are equipped with satellite-based Wi-Fi, providing gate-to-gate connectivity. Shares have been hit recently on earnings and some system glitches, giving investors a very solid entry point.

Shareholders receive a 0.8% dividend. Merrill Lynch recently raised its price target to $58 from $50, and the consensus target is right in line at $58.97. Shares closed Thursday at $51.01.

Wells Fargo

This is a stock for investors to look at now for safety, dividends and solid upside potential. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding, and he raised his holdings in the bank to 10% on the stock’s weakness last year.

The stock had a public relations headache last year when it was revealed that employees allegedly opened up client accounts that were not approved. Things got even worse when its CEO was absolutely eviscerated at a congressional hearing by politicians and ended up resigning. While the stock has rallied off the lows, it probably remains the most affordable of all the major banks.

Shareholders receive a 2.8% dividend. Merrill Lynch has a $65 price target, above the consensus price target of $57.37. Shares closed Thursday at $54.50.

Five outstanding Buy-rated stocks that do almost 100% of their business in the United States. While the dollar’s strength won’t last forever, it has lasted long enough to dent earnings for companies that are big exporters, so these all make more sense now.