It may sound counterintuitive, but the stronger the U.S. dollar gets, the more investors worry.
That’s because a stronger dollar makes U.S. goods and services more expensive overseas, dampening exports and eating into sales.
And the dollar has certainly gone on a rally this year. As measured by the U.S. Dollar Index, the currency is up 8.5% in 2015 compared with the euro, the yen, the pound and the franc.
A strong dollar is particularly harmful to big-cap global leaders with significant offshore exposure.
But a strong dollar also opens up opportunities.
In an environment like we’re seeing today, smaller firms can outperform their much bigger rivals because they are largely focused on domestic markets.
Today, I want to show you a tech-related investment that takes big advantage of this fact – making it a great hedge against the strong dollar.
And right now – it’s priced to move…
Doing My Homework
I spend great deal of my time pouring over earnings reports. Despite their dry surfaces, if you dig deeper, you can often turn up useful insights into new trends.
And for this year’s third quarter, you can see the damage the strong dollar is doing.
Consider PepsiCo Inc. (NYSE: PEP). The beverage and food giant recently reported a 5% year-over-year decline in net sales. But if were able to factor out the dollar’s higher value, sales would have increased by 7%.
On the other hand – and this is good news for you, as a tech investor – surprisingly large numbers of big tech firms are posting sales gains despite the strong dollar.
Take a look at Alphabet Inc. (Nasdaq: GOOGL). The global leader in online search reported $18.7 billion in sales, a 13% year-over-year gain. Still, without the strong dollar, sales would have soared 21%.
That’s why I think now is a great time to look at small-cap tech stocks. Many are in breakout sectors, like the wireless revolution, Big Data, cloud computing and the Internet of Everything.
As a group, these younger firms not only are primarily focused on U.S. operations but also tend to grow sales and earnings much faster than the economy.
And despite the stronger dollar, the U.S. economy continues to outperform much of the world.
Indeed, the third quarter showed things are healthier than economists had expected. Last month, the U.S. Commerce Department estimated GDP growth of 2.1%. That was31.2% higher than federal officials had earlier estimated.
The U.S. Bureau of Labor Statistics reported last week that the U.S. economy added 211,000 jobs in November. Plus, the unemployment rate held steady at 5%, a seven-year low.
Small caps have one other advantage to recommend them – they’re bargain priced.
Stocks on Sale
Here’s how I spotted these markdowns.
I look at stocks’ forward price-to-earnings ratio (forward P/E). I use this number all the time because it tells me how much I’m paying for next year’s earnings.
But the Russell 2000 Index of small- and mid-cap firms has a forward P/E of just 18.5.
That means you can try and pick and choose among bargain-priced yet risky small caps – and hope you find some winners.
Or you can buy a basket of small, hyper-growth companies for 7.3% less than their mega-cap counterparts.
How to Do It
And that’s why I’m recommending the iShares Russell 2000 Growth ETF (NYSE: IWO).
You should think of this exchange-traded fund (ETF) that seeks to mirror the performance of the Russell 2000 as a “twofer” investment.
IWO gives us both exposure to fast-moving tech firms and other growth sectors.
Information technology and health care, which includes biotech and medical equipment, make up 51% of the fund. Other industries represented include industrials, financials and consumer items.
That said, you should be picking up this fund because of its very exciting tech holding. Just take a look at two of its semiconductor firms.
- Integrated Device Technology Inc. (Nasdaq: IDTI), which has a market cap of $4.22 billion, specializes in the hot and rapidly growing field of wireless charging. If you haven’t heard of wireless charging yet, you will soon. It’s a whole new way to charge your mobile devices without any wires. You simply plunk your phone on a charging pad and watch your battery indicator fill up.
According to projections from the Market Intelligence & Consulting Institute, the global wireless charging market will hit roughly $2 billion in sales this year. And that figure is set to rise nearly fourfold to $7.9 billion in 2019. Samsung Electronics Co. Ltd.(OTC: SSNLF) was among the first to snatch up IDTI’s technology to enable wireless charging for its Galaxy smartphones. And IKEA recently launched a new line of lamps, desks and other furniture equipped with wireless charging stations.
- Then there’s Cavium Inc. (Nasdaq: CAVM). This $3.77 billion market-cap company is a fabless chipmaker that sells to several markets, including computer networking, telecom, storage, wireless, security and video. Last year, Cavium reached an agreement to acquire Xpliant Inc. for $90 million. The acquired company specializes in high-speed switches used in data centers and cloud-based operations.
Sometimes Smaller Is Better
The fund also owns Blackbaud Inc. (Nasdaq: BLKB), a $3 billion market-cap software publisher that caters to nonprofits such as research foundations and universities. Some 29,000 clients who rely Blackbaud for help in managing fundraising, accounting, marketing and payment services.
Cepheid Inc. (Nasdaq: CPHD) is a Silicon Valley-based molecular diagnostics company with expertise in genetic testing. The $2.42 billion market-cap company has an in vitro test for meningitis. Cepheid also has checks for other critical infectious diseases, as well as tests for sexual health, oncology and infections.
Fleetmatics Group PLC (NYSE: FLTX), with a market cap of $2.33 billion, is a global leader in tech-based logistics and supply-chain management services for owners of vehicle fleets. It does so delivering via the cloud such data as scheduling, maintenance, invoices, driver IDs and reports, and vehicle location.
In all, IWO provides investors access to 1,186 stocks in a single ETF.
And while it has underperformed the market this year, since the bull market began in March 2009, IWO has gained 243%. By contrast, the S&P 500 is up 184.5%.
That means small caps are beating their bigger rivals by 31.7%.
And that puts IWO at even more of a bargain.
So, while the strong dollar is sapping sales at the global giants, you can stay on the road to wealth by going small.
P.S. It’s getting close to the end of 2015, and that means I’m putting together my forecast for 2016 – including reports on the best stocks to buy in the New Year… and several to avoid. I also want to know what you all are thinking about. Send me your year-end tech investing questions – or any other queries you have – and I’ll try to answer as many as you can before 2015 closes out. To get in touch, just leave a comment below.