Strong dollar to spark M&A boom: Strategist

Published Wed, Feb 4 20156:00 AM EST

It's supposed to be common knowledge on Wall Street that a stronger dollar causes U.S. companies to go buy international companies with their wealthier currency. But a new study by one notable strategist argues that history shows the opposite is true: A stronger dollar leads to foreign entities' buying of American companies, which in turn should further raise U.S. stock values this year. In the report, he names the companies that may be bought out in this 2015 M & A boom. "We analyzed U.S. M & A over the past 25 years and found that extended strength in USD has led to surges in inbound M & A," wrote Thomas Lee of Fundstrat Global Advisors and formerly of J.P. Morgan. "This is an obvious positive for U.S. stocks, from a valuation perspective (premium and boost to multiples) and offsets the perceived earnings 'penalty' from overseas earnings." Western European and Canadian companies are the most likely acquirers, Fundstrat found, and the industrial and materials spaces should be where they find the most value this time around. "While counterintuitive, it is logical—cos invest with better growth (evidenced by USD strength) and bet on persistence of FX strength," wrote Lee. The jump in the U.S. dollar index over the last three months, measuring about 7 percent, should lead to a 17 percent gain from stocks over the next 12 months if the historical trend holds true, according to Fundstrat. The inbound M & A is the big reason, followed by global-leading GDP growth signified by that dollar rise and a P/E expansion as that stronger currency makes future earnings worth more. Lee and his team screened for companies with low return on equity, little leverage and high cash. So they sought to find companies that could use an acquirer to perform better and also have the attractive quality of a strong balance sheet. Read More February outlook: Retail, energy and a correction? Among the 39 candidates in the report are Cobalt International Energy , Pandora Media , Yelp , 3D Systems , Splunk , First Solar , Cabot Corp . and McDermott International . "Overall, M & A surged to a record in 2014, and given the high levels of cash still on balance sheets, we see this surging in 2015," wrote Lee. One possible way for the retail investor to ride this trend without trying to pick the individual stocks is to invest in the SPDR Materials ETF . Using Kensho, a quantitative analytics tool, CNBC.com found that the ETF gained 2 percent in the 30 days after a major deal in the metals and mining space. The study looked at six major deals post the 2007 financial crisis. CNBC's parent NBCUniversal is a minority investor in Kensho.

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It's supposed to be common knowledge on Wall Street that a stronger dollar causes U.S. companies to go buy international companies with their wealthier currency.

But a new study by one notable strategist argues that history shows the opposite is true: A stronger dollar leads to foreign entities' buying of American companies, which in turn should further raise U.S. stock values this year.

In the report, he names the companies that may be bought out in this 2015 M&A boom.