The pound has dropped 12% against the dollar over the last year, which has prompted me to eye up a FTSE 250 stock that could profit from weakening sterling.
Last week, the Financial Times’ personal finance editor Stefan Wagstyl noted the pound’s precipitous plunge against the dollar before recommending readers sell off FTSE stocks and load up on foreign securities.
She wrote: “The global equity sell-off has hit the UK far less hard than rivals…UK equities have done much better, with the energy-heavy FTSE 100 slipping a mere 3%.
“So this could be the moment to take profits at home and invest abroad.”
There’s nothing wrong with investing abroad, but in my opinion, UK investors who are worried about the pound’s weakness needn’t look overseas.
Here is a UK stock that could actually benefit from a weaker pound.
A chance to earn in foreign currencies?
Victrex (LSE:VCT) produces polymers that are sold in over 40 countries, although its manufacturing facilities are based in the UK.
Last year, revenue generated in the UK made up less than 1% of Victrex’s revenue, allowing the company to profit from the pound’s fall against other major currencies.
The company is a world leader in the production of polyether ether ketone (PEEK) polymers, which are incredibly hardy and capable of conducting electricity – making the lightweight thermoplastic a candidate to replace clunky metals in many industrial applications.
PEEK polymers are used in hundreds of engineering applications – for example, to make bearings, piston parts, pumps, HPLC columns, compressor plate valves and cable insulation.
But priced at 18 times expected earnings and with a moderate dividend yield of 3%, Victrex doesn’t really look like a screaming buy at first glance to me.
In addition, the company’s profits have been sliding over the last few years, with EBITDA down from £146m in 2018-19 to £110m in 2021-22 – and in May this year, the company reported that cost inflation had compressed operating profit margins.
Ready for the times to get better…
But Victrex could be on the cusp of turning things around, with the applications for its PEEK polymers still expanding. After all, the material was only invented around 40 years ago, leaving time for plenty more use cases to be discovered.
An ongoing clinical trial is testing out PEEK polymers in knee-replacement surgeries, for instance.
Meanwhile, PEEK polymers are likely to enjoy tailwinds from the green energy transition, with potential uses in electric vehicles and their charging infrastructure, as well as in wind turbine components and in the infrastructure for storing and transporting hydrogen.
For that reason, I think Victrex is far more likely to be going through a temporary malaise rather than a terminal death spiral.
So, with sunnier days possibly ahead for the company, as well as revenue sources coming from more than 40 international markets, I see Victrex as a good stock to hedge my portfolio against further weakness in the pound – as it earns in foreign currencies while reporting in pounds.
The post A FTSE 250 stock that could soar on a weaker pound appeared first on The Motley Fool UK.
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Mark Tovey has no position in Victrex. The Motley Fool UK has recommended Victrex. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.