The greenback has been on a tear of late. The U.S. dollar index, which tracks the dollar’s strength against a basket of foreign currencies, surged by 7.7% during the third quarter of 2014. For investors in U.S.-based multinational companies, that can spell bad news. Almost half the revenues generated by companies in the S&P 500 index come from overseas, and a rising dollar causes those sales to be worth less when they’re converted to U.S. currency. One easy way to hedge against that trend is to buy shares of the big companies that do the vast majority of their business in America.
The dollar’s rapid climb is due in part to expectations that the Federal Reserve will raise interest rates in 2015. At the same time, policymakers in Japan and Europe are keeping monetary policy loose and interest rates ultralow in an effort to revive their limping economies. Taken together, those central bank moves should mean the U.S. dollar will continue to move higher, say experts. Morgan Stanley strategist Hans Redeker, for instance, expects the dollar to appreciate another 12% against the euro and 5% against the yen by the third quarter of 2015. The strengthening dollar is just starting to hit profit forecasts. According to Mizuho Securities, third-quarter 2014 earnings estimates for large U.S. companies that derive more than 60% of their sales from overseas fell 1.5 percentage points during August and September. But estimates declined only 0.4 point for companies with almost no foreign sales exposure.
The best dollar hedges tend to be solid operators in core domestic industries. Supermarket operator Kroger (KR), for instance, generates 100% of its $98 billion in revenues within the U.S. and has now recorded 43 consecutive quarters of same-store sales growth, despite intense competition from the likes of Safeway and Wal-Mart. Kroger also manufactures 40% of its private-label products, allowing it to keep prices low while preserving margins. Guggenheim Securities analyst John Heinbockel, who has a buy rating on the stock, believes the company can deliver annual 8% to 11% earnings growth over the long term. “The company has the ability to focus on where consumers are headed and what their needs will be,” says Heinbockel.
UnitedHealth (UNH), the largest health insurer in the U.S., also derives almost all its sales domestically and recently raised its full-year 2014 earnings forecast, thanks to lower medical costs. J.P. Morgan analyst Justin Lake estimates that in 2015, more than two-thirds of the company’s earnings will come from the high-growth businesses of Medicaid, Medicare Advantage, and Optum, the company’s health-services arm.
And banking giant Wells Fargo (WFC) collects 97% of its revenues from the U.S. as a result of its focus on domestic commercial and consumer lending. Jefferies analyst Ken Usdin believes the bank will grow its loans at a robust 4% annual rate over the next several years. Usdin, who has a buy rating on the stock, thinks the shares could rise by almost 15% over the next 12 months. Sometimes it can pay to stay close to home.
A former compensation consultant, Janice Revell has been writing about personal finance since 2000.
This story appears in the November 17, 2014 issue of Fortune.