Cast your mind back twelve months and investors were clamouring for exposure to stocks with offshore earnings – particularly US dollar earnings – due to the correct assumption that the Australian dollar would fall.
While the currency trade of a weakening Australian dollar against the US dollar has indeed played out and investors who made the call to buy stocks such as Brambles Limited (ASX: BXB), CSL Limited (ASX: CSL) and ResMed Inc. (CHESS) (ASX: RMD) have benefitted enormously, there are reasons to now tread carefully…
1) These stocks may have been 'overbought'.
The share prices up Brambles, CSL and ResMed are up 19%, 33.5% and 33.5% respectively over the past year. In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has gained just under 5%. With substantial operations in the US, these three leading companies do all enjoy significant leverage to a weaker exchange rate, however, arguably this benefit has been well and truly captured by the sharp rally in their respective share prices.
2) Valuations could be considered very full or indeed overvalued.
Looking forward to financial year 2016, according to consensus data provided by Morningstar, Brambles, CSL and ResMed are trading on forecast price-to-earnings ratios of 20.5x, 21.5x and 23.3x. These are hefty multiples which may be justified by a combination of relative valuations, above average quality businesses and above average growth rates however there also looks to be little room for error.
3) Losing momentum?
While the past 12 months have provided significant outperformance and great returns for shareholders in these three companies, the returns over the past six months have not been so impressive. In fact, over the past six months all three stocks have underperformed the index which could be a sign that the currency trade rally is losing momentum.
