Be warned: the falling US dollar could crush these top FTSE 100 stocks

Hulk monster
Hulk monster

The shock Brexit result in June 2016 was a disaster for the pound, but a triumph for the FTSE 100. As sterling crashed against almost every global currency, the country's blue-chip stocks flew. Companies on the UK's benchmark index generate more than three-quarters of their earnings overseas, and these were typically now worth around 16% more once converted back into sterling.

Dollar dip

However, now the trade is going the other way as the pound strengthens and the dollar weakens. The winners of the last 18 months risk becoming 2018's losers.

Naturally, some FTSE 100 companies did better out of sterling's meltdown than others. Plant hire specialist Ashtead Group has more US exposure than any other stock on the FTSE 100, generating a whopping 85% of its sales in the US. Its share price has almost exactly doubled from 1,014p immediately after the referendum to today's 2,116p.

North American exposure

Other factors are at play as well, for example Ashtead benefitted from another type of storm, hurricanes Harvey, Irma and Maria, winning valuable clean-up contracts. Along with the weak pound, that helped it posted a 16% rise in half-year pre-tax profits to £493.1m last month.

Plumbing supplier Ferguson(LSE: FERG) generates 79% of its earnings from the US and has been another beneficiary, its share price leaping from 3,554p to 5,542p since the referendum, a rise of 55%. It is the same story with Shire Pharmaceuticals, which has 67% US exposure, and saw its share price leap almost 30% in the months after the referendum. Cruise operator Carnival, which has 64% dollar earnings, saw its stock jump 58% from 3,389p to peak at 5,355p last September.

Pound strong

Naturally, high dollar earnings are no guarantee of success even when the greenback is riding high against the pound. Shire has struggled since its $32bn acquisition of US company Baxalta in 2016, which as my foolish friend GA Chester pointed out, has increased debt and risk. And publishing group Pearson earns a hefty 64% of its income in the US but has been hit hard by falling educational sales in North America. Its dollar earnings have fallen, as has its share price.

However, even success stories will find making progress harder as currency tailwinds turn into headwinds. One year ago, the pound traded at just over $1.25. Today, it is a little over $1.40, a rise of 12% in a year. Anybody invested in Ashtead, Ferguson, Shire, Carnival or Pearson needs to take this into account. A US bear market would be another blow.

So far the FTSE 100 as a whole has held up despite dollar weakness. That now hangs in the balance as well.

Brexit Britain

Naturally, currency shifts are not the only issue. Ashtead is still flying, up 32% in the last six months. However, currently trading at 25 times earnings, maybe it is not such a hot play today. Ferguson is also continuing its rally, while Shire stumbles and Carnival is becalmed. Pearson is also struggling, but as Roland Head pointed out, it could be on the cusp of a turnaround.

The pound may have beefed up against the dollar but there is no guarantee this will last. If Brexit negotiations hit a wall it could quickly lose its newfound muscle.

Brexit looks more complex by the day and whether you voted Leave or Remain, your portfolio remains at serious risk if it all ends badly.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival and Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.