US vs. Foreign Revenues

Last week we highlighted how companies with a greater percentage of their sales coming from outside the US had a higher likelihood of beating their consensus top and bottom line forecasts.  Following up on that idea, we created two indices of S&P 500 stocks based on each company's percentage of international sales.  Companies with more than half of their sales coming from outside the US (91) were divided into one group, while the remaining 409 stocks made up the other group.  The performance of each group was then calculated and plotted in the chart below giving each stock an equal weight.  Surprisingly, stocks that get more than half of their sales in the US are actually outperforming stocks with greater international exposure over the past year.

While the results are somewhat surprising, one factor which skews the results is the starting date of May 3, 2006, which coincided with the global equity sell off that had its most negative impact on the materials and energy sectors.  These two sectors, as we pointed out in last week's report (email info@bespokeinvest.com for your copy), along with technology, also happen to have the greatest sales exposure to foreign markets.

In the chart below we plotted the spread between the two above series (green line) along with the US dollar (gray line).  As the chart details, over the last year, the two series have moved relatively in tandem with each other, although most recently, the stocks with greater international sales do not appear to have rallied by a similar magnitude as the decline in the US dollar. 

Comments

[will rahal]

If you visualize the US Dollar as a 6-month leading indicator for the chart above, you can conceputalize how the performance is going to favor stocks with international exposure.The large caps should outperform the small-caps because of this exposure.
Also large caps are half as expensive as small-caps. See
wrahal.blogspot.com "Large vs Small Stocks"
(April Archives)

[will rahal]

Sorry, for the above comment
it should be "Small-caps vs Large-caps". Here is the link:
http://wrahal.blogspot.com/2007/04/small-caps-vs-large-caps.html

[Born2Code]

i am not sure why you find the results surprising? The dollar is declining and the economy is barely growing. On the other side of the pond the growth rate is higher and the currencies are rising.
I would've been surprised if the results were different than what u got.

[Paul Hickey]

Born2Code,

I agree with you, which is why we were surprised that companies which rely more on sales from the US are actually outperforming companies which derive more of their sales from outside the US.

Paul