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Investors hunting for stocks to buy in October might be tempted by the pound’s slide against the dollar. But that might not be the opportunity it seems.
A weaker pound does mean better returns for shareholders in companies with significant US exposure. When it comes to buying however, it’s a different story.
Exchange rates
Sterling hit its lowest levels since July last week, driven by strong US data and Autumn Budget nerves. That means dollar profits are worth more when they’re converted back into sterling.
There are plenty of FTSE 100 companies where this has a real effect. Bunzl, Experian, and InterContinental Hotels Group all have the US as their largest market.
Compass Group‘s (LSE:CPG) one I find particularly interesting. It declares dividends in US cents, but UK shareholders receive pounds:
| GBP/USD | Sterling value of 25.5c dividend |
|---|---|
| $1.34 (July’s rate) | 19p |
| $1.32 (now) | 19.3p |
| $1.25 | 20.4p |
That’s great news for anyone who already owns shares in the company – as I do. I don’t however, think it’s a reason to buy right now.
Why it doesn’t matter
The effect of currency moves on investment returns is real. But the trouble for investors looking for opportunities is that share prices adjust to reflect this.
In some cases, it’s automatic. Compass shares have been quoted in dollars in London since April, so a UK investor today pays more in terms of pounds to buy the stock.
Mostly, however, shares are still quoted in pence. But a weaker pound makes the underlying dollar earnings worth more in sterling, which puts upward pressure on the share price.
Either way, there’s good reason to doubt the buying opportunity. Other investors aren’t as flat-footed as we might like to think.
It’s possible to find inefficiencies in the stock market – that’s what investing’s all about. But I don’t think exchange rates are the obvious place to look.
What matters instead
When looking for potential shares to buy, what matters most is long-term competitive strength. And Compass Group actually fares pretty well by these standards.
The contract catering firm’s big risk is AI. If it means fewer office workers – or companies consolidating their locations – demand for workplace catering falls. That’s an industry-wide problem. But I think Compass is better-equipped to deal with it than any of its rivals.
The firm’s scale gives it a cost advantage that it can – and does – pass on to customers. That puts it in a much stronger position when it comes to competing for new business.
Despite this, the stock’s down around 10% since the start of the year (while the wider FTSE 100 has advanced 7.5%). And I think that’s worth paying attention to.
Bottom line
Investors shouldn’t try to get too cute with exchange rates – share prices usually reflect them one way or another. It isn’t impossible to find inefficiencies, but there are much more promising places to look.
I bought Compass shares earlier this year and I’m looking to add to my stake in October. The weak pound has nothing to do with it – the faltering share price does.
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Stephen Wright owns shares in Bunzl and Compass Group.
This story originally appeared on Motley Fool
