Stock Picks for a Weak Dollar (AFL, EWJ, HON, IYE, IYJ, PXJ, RTN, VDE, VIS, XLE, XLI, XOM)

by: Jonathan Liss

Yesterday's New York Times Business Section included a J. Alex Tarquinio article entitled, "Can the Dollar's Loss Become Your Portfolio's Gain?" In addition to discussing the dollar's long-term prospects and the effects that a weaker dollar will have on the U.S. market, several top Wall Street analysts were asked which stocks they believed stood to gain even more from a weak dollar.

The following picks are exerpted from the piece:

Henry McVey, chief United States investment strategist, Morgan Stanley

"Buying stocks just because of a falling dollar is not a good strategy. But buying stocks based on good fundamentals, and getting the tailwind from a falling dollar, that is a good strategy."

For instance, Mr. McVey said, a weaker dollar would benefit two stocks that were already among his favorites: Aflac (NYSE:AFL), a health and life insurer based in Columbus, Ga., and the energy giant Exxon Mobil (NYSE:XOM). Both companies derive about 70 percent of their sales abroad, and that revenue is worth more in dollars if the currency weakens.

Richard Bernstein, chief United States strategist, Merrill Lynch

Mr. Bernstein said he expected the falling dollar — combined with a cooling housing market — to dampen domestic consumption eventually. "When your currency falls, your standard of living drops," he said, pointing out that through Wednesday, the price of a barrel of oil had risen about 12 percent this year in dollars, but only 6 percent in both euros and Japanese yen and only 3 percent in British pounds.

He said American companies that rely on discretionary consumer spending might feel the brunt of a weaker dollar — for instance, clothing retailers, cruise lines, automakers and home improvement stores.

So he is advising investors to focus on big American exporters in industries like electrical equipment and aerospace and military contracting. Some of Merrill Lynch's top stock recommendations in these industries include Honeywell International (NYSE:HON), the electronics and aerospace company, and Raytheon (NYSE:RTN), the military contractor.

Michael Metz, chief investment strategist, Oppenheimer & Company

"There's been an enormous consumption boom in the United States fueled by leveraging, not from rising real incomes," Mr. Metz said. He expects domestic economic growth to slow to something closer to the rate of increase in American incomes, which he predicts will be less than 3 percent.

Mr. Metz says he likes the industrial sector of the American stock market but does not recommend picking individual stocks. Instead, he suggested buying exchange-traded funds that focus on industrial, energy and raw-materials stocks. He also said ETFs were the best way to buy foreign stocks; for example, he called the iShares MSCI Japan Index fund (NYSEARCA:EWJ) a fair proxy for the Japanese stock market.

Over all, Mr. Metz recommends that individual investors put 25 percent of their total portfolios into domestic stocks, particularly large exporters in the industrial, materials and energy sectors.

[Editor's Note: ETFs that capture the industrial market include: (NYSEARCA:IYJ), (NYSEARCA:VIS), and (NYSEARCA:XLI). ETFs that capture the energy market include: (NYSEARCA:IYE), (NYSEARCA:PXJ), (NYSEARCA:VDE), (NYSEARCA:XLE).]

Edward E. Yardeni, chief investment strategist, Oak Associates

Mr. Yardeni said he thought that sector selection was the key to successful investing now.

"I'm not sure that playing the S.& P. 500 index will be a winning strategy for some time," he said. The materials, industrial and energy sectors are likely to be among the strongest in the American stock market, he said, no matter what happens to the dollar.

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