US tourists may rue the falling dollar. But US multinationals are cheering as it plumbs new lows. Overseas sales are translating into more greenbacks. Indeed, in the past few weeks, a host of companies announced surprisingly good first-quarter results due to gains in overseas sales, including Caterpillar, Coca-Cola, Colgate-Palmolive, Ford, Google, IBM, Johnson & Johnson, McDonalds, Honeywell and Pepsi.
The stocks of US blue chips have underperformed their smaller brethren for years. Over the past five, investors would have earned about twice as much for holding the small cap Russell 2000 index compared to the large cap S&P 500. But a falling dollar and a slowing US economy should mean a passing of the baton.
The dollar hit a new low of $1.36 per euro on 26 April. Over the past three months, the dollar has lost 4% of its value against the euro. Over the past five years, it has lost 44%.
Add up all the sales by companies in the S&P 500, and close to half came from overseas.
Similar figures aren’t available for smaller companies, but perhaps 8% of the total US economy came from exports. It’s clear that bigger companies are far more reliant on foreign sales than small fry.
Moreover, investors still prefer minnows to whales. Historically, mega-caps trade at about a 15% premium to smaller companies based on earnings due to their stability and higher yields.
Today, the biggest 25 companies in the S&P 500 index trade at 15% discount to the Russell 2000 based on estimated 2007 earnings. Whether big US stocks are a bargain is questionable. But they are certainly a better value than US small caps.