The dollar strikes back. While a strong dollar has helped many exporters and US travelers to Europe, tech companies and others with big profits overseas are feeling the strong dollar’s pinch. This earnings season already has revealed the latest victims of the strong buck, including DuPont, P&G, Pfizer and Caterpillar. A strong dollar typically decreases demand for US exports and reduces the value of overseas sales when they are translated back into USD.
According to Markit, however, it is technology companies with the most to lose. That’s because many big techs make much of their profit overseas. “The rising dollar has the potential to give foreign companies an edge over their US competitors, which could drag on results in the coming year,” Markit writes.
And while cash-rich tech companies have attracted the attention of activists looking for them to return cash to shareholders, they are also attracting attention of short-sellers, Markit says. In fact, almost all companies with mostly overseas profits are seeing increased short-seller interest. “[Tech] firms have seen average short interest spike up by 4 percent in the last six months whereas the overall US group has seen average 2 percent covering.”
Markit cites to companies seeing a lot of short selling: in the tech sector, Vasco Data Security, which generates more than 90 percent of its revenue offshore, has seen more than 18 percent of its shares sold short in the last six months. And AGCO, a supplier of agricultural equipment, “has seen short interest more than double in the last 12 months to 13 percent of shares. “This was most likely encouraged by the fact that the firm derives nearly 75 percent of its revenues from outside North America,” Markit says.
Still it’s a risky game for short-sellers, particularly as many companies have been allocating cash to buyback stocks. Stock repurchases can suddenly deflate a good looking short.