As the Dollar Stays Strong, These 3 Stocks Will Shine

Key Points

• A flight-to-safety attitude helps investors find a path to stocks that benefit from a stronger dollar.
• Apart from benefiting from being importers, domestic demand will be one of the main forces behind these stocks' rally.
• Wall Street analysts recognize the trend, and they've been pushing for double-digit upside in their price targets. 

Most investors are focused on the rallies in the technology sector today, particularly around companies dealing with artificial intelligence and the broader chips and semiconductor names like NVIDIA Co. NASDAQ: NVDA. However, recent selloffs in the space have triggered a so-called flight-to-safety in the market, leading investors into other asset classes like gold and currencies.

This trend could explain why gold prices have recently reached an all-time high and why the dollar index has kept its high levels as well despite the United States economy experiencing higher than normal inflation rates (which should be bad for the currency). Among all of these trends, investors can—and should—focus on one thing: a list of stocks that will potentially outperform as long as the dollar stays strong.

Making a list are domestic-demand and import-focused stocks like Target Co. NYSE: TGT, Home Depot Inc. NYSE: HD, and even Walmart Inc. NYSE: WMT come to deliver a potentially bullish future for those willing to allocate into these domestic business models.

How Target Stock Helps Consumers Battle Inflation

Everyone knows inflation is taking a toll on American consumers, as evidenced by the rising charge-offs and credit card delinquencies reported by commercial banks like Bank of America Co. NYSE: BAC. This is why Target and other domestic consumer discretionary businesses decided to lend a helping hand.

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By lowering prices on more than 5,000 items, Target is now helping consumers buy a lot more of the products they need with the strong dollars they have on hand. That’s also good for business since Target needs to import most of the things it sells.

On a twenty-foot equivalent unit (TEU), Target is now the second-largest importer in the U.S., having imported 590,300 units over the past year. So, as long as the dollar stays strong on this flight-to-safety trend, Target will be able to buy products on the cheaper end from foreign producers to maintain margins, which also enables management to help pass savings onto the consumer.

This is why analysts on Wall Street forecast up to 12.8% earnings per share (EPS) growth for the next 12 months, encouraging those at Deutsche Bank to slap a price target of $190 a share for Target stock, daring it to rally by 26.9% from where it trades today.

Home Depot Stock Gains Momentum with Strong Dollar Boost

Leaning on the solid consumer stance aided by a strong dollar, the Home Depot also has the promise of the Federal Reserve (the Fed) looking to cut interest rates by the end of the year. According to the CME’s FedWatch tool, these cuts could be here by September 2024, with over 90% probability.

Lower interest rates will mean lower mortgage rates as well, which is good news for those looking to invest part of their budgets into home renovation and improvement projects. Compared to its competitor, Lowe’s Companies Inc. NYSE: LOW, which owns roughly 6.9% of the home improvement market, Home Depot holds a 12.3% market share.

With the new consumer wave about to potentially turn to home improvement, or at least see the boost come from the rise in U.S. home listings, analysts at TD Cowen placed a price target on Home Depot stock of $420 a share, calling for a rally of up to 15.5% from today’s stock price.

Realizing that Home Depot stock has more bullish evidence than bearish, short sellers decided to retreat recently, as the stock’s short interest declined by 9.7% in the past month. This retreat left room for those at Raymond James to boost their positions in Home Depot stock by 0.5% as of July 2024, bringing their net investment up to $1.2 billion today.

The Impact of a Strong Dollar on Walmart Stock Performance

Walmart's latest quarterly earnings report shows that revenues jumped by 6% in the past 12 months, which is above inflation rates and U.S. GPD growth. The store's relatively new e-commerce global presence also saw a 21% revenue increase.

Despite joining Target in cutting prices on hundreds of items, Walmart reported a gross margin increase of 0.42%, bringing the net rate up to 24.1% today. All these benefits stem from a stronger dollar and translate into a 22.4% jump in earnings per share (EPS).

The result of these combined trends was Walmart's stock reaching an all-time high recently. Knowing that the flight-to-safety and a stronger dollar will continue to push Walmart's financials higher, analysts at KeyCorp decided to boost their valuations for the stock up to $82 a share, representing an upside of 16% above where the stock sits today.

Of course, a strong quarter, and strong ones to come, benefit shareholders. Walmart management gave back up to $1.1 billion to investors by buying back up to 18 million shares off the open market, signifying that insiders themselves are expected to have an even brighter future.