With Aussie dollar riding high, there may never be a better time to buy American shares.
Whole bookshelves of research have been conducted to pin down the exact reasons for currency movements, with only moderate success. Broadly, the economic growth of a country and that country's interest rates (again, relative to others) are widely accepted as two of the key inputs.
Whatever the reasons, the dollar is now sitting well above parity. For many, this has the effect of making shopping and travelling overseas much more attractive. It's little wonder the growth of online retailing has been so strong.
Just as the Australian dollar's appreciation has made buying clothes and books from overseas more attractive, the same should be said of shares. The dollar has appreciated by over 20 per cent from around $US0.90 in the space of a year. You can now buy 20 per cent more shares in a company listed on the New York Stock Exchange than you could this time last year.
Of course, that only applies if the share price is the same as it was 12 months ago. The broader point is that if today's price represents good value in US dollars, you're buying at a discount relative to that same valuation a year ago.
Buy shares like clothes – on sale
Many a value investor uses the analogy of clothes prices to explain their approach to buying shares. When the price of a shirt is reduced, you're likely to buy more, not less. While share price drops can be unnerving, they often provide an opportunity to buy great businesses 'on sale'. Rather than fearing the drop, you should be excited by the opportunity.
A cursory look at some household names on the NYSE and Nasdaq exchanges suggests that some of these companies may well be on sale.
An opportunity to buy?
Microsoft needs no introduction. The maker of the ubiquitous Windows operating system and Office productivity software as well as the must-have X-Box gaming console is trading at around the same price – in US dollars – as it was 5 years ago, while earnings per share (EPS) has grown 92 per cent. Microsoft is now selling for a price that implies little or no growth, at a price-earnings ratio of a touch over 10.
In December 2008, shares of US-based The Coca-Cola Company were trading at around US$63. Two and a half years later, they trade at a little less than 10 per cent more, despite EPS doubling since that time. Coke has a trailing P/E of only 12.6 times earnings.
Branding agency Interbrand ranked Apple as the 17th most valuable brand in the world in 2010. Unsurprisingly, given the success Apple has had with the iPod, iPhone and iPad, the share price has more than doubled in the past three years. Despite that meteoric rise, profits have grown at a faster pace – tripling in the last three completed financial years. While a price-earnings ratio of 15.7 isn't traditionally cheap, Apple's growth trajectory may well make today's price look inexpensive.
Foolish take-away
Great businesses with wonderful economics and significant competitive advantages should be at the top of every investor's watchlist. A United States-based investor has the opportunity to invest in these companies at what history may well deem undemanding multiples.
An investor with Australian dollars to deploy has the same opportunity, but with cash that today buys many more US dollars than this time last year.
Investing in shares overseas has rarely been easier for Australian investors. Many Australian and US-based brokerages offer access to US and European exchanges – just make sure you shop around for a good deal.
This article contains general investment advice only (under AFSL 400691).
Scott Phillips is The Motley Fool's feature columnist. Scott owns shares in Microsoft and Coca-Cola. The Motley Fool's purpose is to educate, amuse and enrich investors.