The Fed is going to continue to prop up the economy as long as stimulus continues and Dow (DIA) dog General Electric (GE) stands to benefit from its status as a global business leader as well as the broader market through SPDR Index ETF (SPY).
Too many investors fail to consider the effect the currency market has on their investments, the current effect is bullish for U.S. exporters. Central banks around the world are implementing stimulus strategies that invariably affect international trade and can act as an immediate boost or headwind for companies doing business internationally, so it is a necessity to consider central banking policy and currency markets when investing. Monetary policy around the world has become more active and dovish and the risk of currency devaluing or inflating and is going to be a major variable as early as Q1 earnings and well into Q2 earnings. This is especially true for U.S. exporters to countries with more dovish, stimulus oriented central banks. One cannot forget the risks foreign central banks may pose to U.S. companies doing business with them.
A reasonable investor should know that as the dollar strengthens against other currencies, domestic exporters lose value and vice versa. This is because while the exported item may not cost any more dollars, ut those dollars are worth more yen, yuan, Australian dollar, euro, etc. To convey the impact of the foreign exchange market as an integral piece of the fundamental value of a company, take for example a US exporter like Johnson & Johnson (JNJ), which feels pain as USD/JPY increases. This has been the case recently as the Bank of Japan's easing has outpaced that of the Federal Reserve. A hypothetical Japanese grocer who buys 3 pallets of diapers every three months from Johnson and Johnson paid ¥ 168,000 JPY (about $2,000 USD) in December, 2012 would now have to pay have to pay about ¥ 191,660 (still about $2,000 USD) in March 2013.
The above USD/JPY example indicates how FX values can affect domestic trade with Japan, one of the world's largest economies. Fortunately for U.S. exporters, Japan is one of few outpacing the U.S. monetary policy. This is evidenced by the performance of Johnson and Johnson, which deals with just about every other country. The key take away is that despite currency risk developing around the world, Johnson & Johnson is testament that domestic monetary policy has helped more than foreign monetary policy has harmed U.S. companies as the stock is up about 11% in the same time period. Fed policy has governed the dollar from strengthening too fast against the Japanese yen and from weakening the U.S. dollar too fast against other currencies, this makes U.S. monetary policy a tailwind to U.S. equities because his helps U.S. exporters and supports the U.S. economy.
While Johnson & Johnson is back up to its all-time highs, General Electric is up over 8.5% in the same three months, and yet continues to lag its peers since the recession. Despite focused consolidation by selling NBCUniversal assets recently and a history of dividend growth through 2012, GE is still down over 42% since 2007. The underperforming stock price presents limited further downside risk even though it is up nearly 100% since its recession lows. It lags 3M (MMM) and many other industrials that have rebounded to at least their 2007 highs. The SPDR Industrial Sector ETF (XLI) is up over 170% since its lows, and GE is simply not underperforming the sector or market to this degree.
General Electric continues to focus on innovating and streamlining its businesses and creating value for its shareholders and presents a great investment opportunity at its current price as the Federal Reserve furthers U.S. stimulus. General Electric has positioned itself to support its major lines of business and its prospects continue to look better. Nearly 10% EPS growth is expected and the stock is trading at a price to sales ratio of 1.65 indicating value. This compares against competitor 3M price to sales of 2.43. GE is an excellent play because of its value and because of its significant dividend yield that continues to grow, currently at 3.25%. Given the growth prospects for General Electric, the company's post-realignment strategy and current value, together within the context of the Fed assisted bull-market, GE appears to be charged for more upside ahead.