When the biggest investment banks in the financial market guide Main Street into one strategy, they usually do it in a subtle way to test the waters. If there is a lot of traction behind the idea, then they will pull out the “big guns” in a wave of content, guest interviews, or other ways to get more minds—and capital—behind a recommendation.
Today, those at Morgan Stanley (NYSE:MS) have recommended investors sell US dollars. Now, that’s an open-ended recommendation that conflicts with the views regarding the new potential trade tariffs being proposed by the newly elected United States administration. However, when investors zoom out and check the price action in other asset classes away from currencies, like bonds and commodities, it is very clear that the market does want a lower dollar.
Also, as judged by the manufacturing PMI index, the manufacturing sector is in a 25-month contraction now, and only a lower dollar can bring it back to life. This is why investors can look into stocks like Caterpillar (NYSE:CAT) as a net exporter or Occidental Petroleum (NYSE:OXY), as oil demand in a lower dollar will boost the energy sector. Finally, Alibaba (NYSE:BABA) rides the higher valuations that overseas stocks enjoy from a lower dollar every cycle.
1. Caterpillar: Why a Weaker Dollar Could Enhance Stock's Growth Potential
As a U.S. manufacturer and net exporter, Caterpillar could see sales improve if the dollar weakens. A stronger foreign currency relative to the dollar increases buyers’ purchasing power, enabling them to place larger orders with Caterpillar than they can today.
This is always the fundamental reason industrial stocks outperform. Weaker domestic currency tends to trigger new orders for durable goods needed by other nations, boosting earnings and stock prices. Because Morgan Stanley analysts call for this trend, those at J.P. Morgan Chase decided to get ahead of the pack and recommend Caterpillar stock.
As of December 2024, these analysts have kept their Overweight rating on the company, which came alongside a $515 price target for Caterpillar stock. To prove these new views right, the stock would have to rally by as much as 30.3% from where it trades today, showing retail investors how much traction this currency shift can have in the company.
Besides these analysts, some institutional buyers are trickling into Caterpillar stock today. Allocators from Geode Capital Management decided to boost their holdings in the company by 0.7% as of November 2024, bringing their net position to a high of $4 billion today, or 2.1% ownership in Caterpillar.
2. Occidental Petroleum: How Rebounding Manufacturing Activity Could Drive Oil Prices and Boost Stock
From the lower dollar and the potential rebound in manufacturing activity within the United States might come a new wave of oil demand to accommodate the production and transportation of raw materials and finished goods. Knowing this, Warren Buffett has accumulated up to 29% of Occidental Petroleum's stock.
And that is not just a simple value play, as he has been selling other names in the portfolio, such as Apple (NASDAQ:AAPL) and Bank of America (NYSE:BAC), leading markets to think that there might be a broader view and opinion behind his decision.
Either way, Occidental Petroleum stock is a value play, especially as oil prices have struggled to keep above $70 a barrel for this long. Compared to its average price-to-earnings (P/E) valuation of over 30.0x historically, today’s 13.3x multiple will make this stock an interesting deal to look into. This is also why analysts feel so comfortable boosting the stock.
As of November 2024, Raymond James analysts decided to keep their Strong Buy ratings on Occidental Petroleum stock while placing a $78 a-share valuation on the company. Compared to today’s stock price, this view implies a net upside of 60.8% from where the stock is today.
3. Alibaba: Falling Dollar Fuels Overseas Stock Gains, with Chinese Firm Leading the Pack Today
Mega investors like Michael Burry and David Tepper have found enough reasons to make Alibaba stock their largest holding in their respective funds. While some views can justify a much higher valuation in the company, it all boils down to where the dollar trades today and where it could trade tomorrow.
If analysts at Morgan Stanley are right to call for a dollar decline, then overseas stocks (pegged to dollar fluctuations) will rally, just like any dollar-quoted commodity rises when the dollar declines.
Knowing this to be accurate and the stock to be as cheap as it is today, management has implemented a $25 billion stock repurchase program for Alibaba shares.
More than that, it is why analysts at Macquarie boosted Alibaba from a Neutral rating to Outperform as of October 2024. They value Alibaba at $145 a share today and have not changed this conclusion since the ratings came in, a position that implies as much as 61.2% upside from where the stock trades today.
As a final gauge of this trend, investors can double-check the $5.5 billion of institutional capital that has entered Alibaba over the past 12 months alone.