Earnings season is nearly upon us, and Club members should be prepared to hear a lot about the adverse effects of the strong U.S. dollar in the quarterly releases, forward guidance and on conference calls. Just look at Piper Sandler’s note Friday on Club holding Microsoft (MSFT): Analysts lowered their full-year 2023 sales and earnings estimates for the tech giant. A potential slowdown in enterprise information technology spending was also a consideration, but Piper largely focused on currency-related challenges for Redmond, Washington-based Microsoft, which generates roughly half of its revenue outside the United States. Last month, Microsoft warned that quarterly numbers would be weaker due to the dollar, which has only strengthened since then; hence the Piper estimate cuts. Microsoft isn’t the only company in our portfolio subject to currency risk. Before we get into the others and a handful of our holdings that only do business in the U.S., here’s why the dollar has been soaring. What’s happening The U.S. dollar index has marched higher throughout this year, setting a series of 20-year highs. The index — which measures the dollar against six other currencies including the euro and Japanese yen — rose again Friday after the June jobs report was released. The euro and the dollar are just cents away from parity. The U.S. government’s better-than-expected nonfarm payrolls number bolstered the market’s view that the Federal Reserve will raise interest rates by another 75 basis points at its policy meeting later this month. That view made its way to the currency market, pushing up the dollar further — a microcosm of what’s transpired all year long. In general, as the Fed starts to raise rates, Treasury yields also tend to move higher. This often attracts more money into U.S. from international investors, who buy dollar-denominated bonds in hopes of getting yields higher than they can get in their own country. This dynamic is believed to be a main factor in the dollar’s rise so far in 2022, as the Fed tightens policy more aggressively than many other central bank peers. Another dynamic likely at play is the idea of the U.S. as an investment haven. Russia’s war with Ukraine has sparked considerable geopolitical and economic uncertainty in Europe, while China’s unpredictable enforcement of its zero-Covid policy has been another drag on the global economy. There’s also economic uncertainty in the U.S., to be sure, but it’s about relative safety. The U.S. offers that, boosting the dollar’s attractiveness on the world stage. Why it matters Currency markets are complicated, and predicting what the dollar will do next is not something do. Additionally, we do not make long-term investment decisions based on foreign exchange considerations. However, we do try to understand what’s going on so we can prepare ourselves for a range of possible outcomes in the short term. Remember, the best investors balance a long view with a short-term focus as part of their homework on their stock holdings. For U.S. consumers, a strong dollar is generally a good thing. Not only does it make it cheaper to travel internationally, but it also lowers the cost of imported goods. (However, it’s worth noting that while the dollar is strong against other foreign currencies, its buying power has been declining lately due to rampant inflation in the U.S.) The near-term implications for investors are different. This earnings season, U.S.-based companies that have large international businesses are likely to suffer the consequences of the strong dollar. The primary reason is that converting overseas profits earned in weaker currencies into dollars can weigh on topline sales and bottom-line earnings. There are a number Club holdings beside Microsoft that have large international businesses, according to data compiled by Bloomberg. Johnson & Johnson (JNJ) books roughly half of its sales internationally. Procter & Gamble (PG), which generates roughly 56% of its sales internationally, warned in April of a $300 million after-tax hit related to foreign exchange rates. Nearly 96% of Qualcomm ‘s (QCOM) revenue is derived internationally, based on the locations of where the chipmaker’s customers make their respective products. Life sciences firm Danaher (DHR) gets roughly 60% of its sales outside the U.S. On the other hand, some American companies won’t have to worry about converting overseas profits since they don’t have any of them. Club names in that category include oil and natural gas companies Pioneer Natural Resources (PXD) and Devon Energy (DVN) as well as health insurer Humana (HUM). All three, which derive 100% of their revenues from the U.S., were among the nearly 20 firms featured in a r ecent CNBC Pro analysis meant to help investors identify companies with favorable analyst ratings and at least 80% domestic sales. Wells Fargo (WFC) and Coterra Energy (CTRA) also generate 100% of their revenue domestically, while almost all of beer, wine and spirits giant Constellation Brands (STZ) sales are booked in the U.S. Disney (DIS) gets about 80% of its revenue from the Americas. Bottom line While recognizing these differences in geographic revenue mixes is helpful right now, it’s critical to remember what the overarching goal is as a long-term, fundamental investor. At its most basic level, we want to buy pieces of great companies that grow to become more valuable than they were when we bought our shares. There will be quarter-to-quarter fluctuations, and currency headwinds can factor into that for some companies. Our primary focus is ensuring the fundamental performance of the underlying business remains intact. (Jim Cramer’s Charitable Trust is long MSFT, JNJ, PG, QCOM, DHR, PXD, DVN, HUM, WFC, CTRA, STZ and DIS. See here for a full list of the stocks in the portfolio.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
