These Stocks Have Dangerous Exposure

"Europe hasn't been steamrolled like this since the U.S. Dream Team ran their basketball teams off the court in the 1992 Olympics."

That's the hilarious and oh-so-accurate line my Global Gains co-advisor Nathan Parmelee tossed out to describe the carnage we've seen on the continent over the past few months since the Greece debt crisis dropped.

Yet Europe's problems didn't start with Greece, and won't stop there. Debt and deficit issues plague many of Europe's countries, including Italy, Spain, Ireland, and Portugal.

Furthermore, it's not clear that the joint EU/IMF near-$1 trillion bailout will be enough to help these countries get through this crisis, or if Europe's governing financial bodies have enough autonomy to continue to implement decisive action plans.

All of this has caused investors to sour on Europe, its businesses, its growth potential, and its currency. A single euro now fetches just $1.22. That's a 15% drop since the beginning of the year, as well as a low not seen since 2006.

With analysts expecting the euro to fall further, the question is: Are you inadvertently exposed?

What, you worry?
Even if you don't own European stocks, the euro contagion has the potential to spread into your portfolio. Many blue-chip U.S. businesses derive a significant amount of business from Europe. As the euro continues to weaken, these sales will be worth less in dollar terms, and profit margins will narrow. And while many European stocks have already dropped to reflect this risk, many U.S. stocks with the same magnitude of euro exposure have not.

Consider, for example, the following list of U.S. companies. All are up since the euro started plummeting some three months ago, despite their significant euro exposure.

Data from Capital IQ and Morningstar.

If you own any of these stocks, you may now be worried about the euro exposure that has crept into your portfolio. But what can you do about it?

Don't sell...hedge
One approach would just be to sell. However, the downward pressure on the euro is a temporary phenomenon, and a company like McDonald's has significant future opportunities to grow operations in other markets around the world. If you sell now, you may never get back in.

Another option is to hold and ignore the volatility. While this is a reasonable approach, many investors don't have the stomach to watch stock prices swing wildly. That tends to be most true of investors near or in retirement.

So if you don't want to sell, and you don't want to hold, your other option is to hedge. That means buying protection against the euro exposure, so that if the decline in the euro causes these stocks to drop, your loss would be balanced out by gains in your protective vehicle.

Here's a hedge that worked
Back on April 1, worried about the future of the euro, I recommended that investors buy Philip Morris International (NYSE: PM), a good company with strong cash flows and growing emerging-markets exposure that had been sold off because of its 46% revenue exposure to Europe.

Yet even though I thought the stock was cheap, I thought it might sell off more if the euro continued to drop. As a result, I recommended that investors also hedge that position in Philip Morris International buy buying $1 worth of ProShares UltraShort Euro (NYSE: EUO), an exchange-traded fund that rises as the euro falls, for every $2 worth of Philip Morris International. Here's how that trade has worked out thus far:

Although Philip Morris stock has declined, the hedge has worked to protect our principal. And while I expect to maintain the euro short for the time being, given the problems in Europe, as the pressure on the euro alleviates in the future, we can roll our gains on our euro short into Philip Morris at an even more attractive price. Again, this is a strategy anyone who owns the five stocks listed above should consider.

That just happened
This is just one example of how trading strategies such as hedging can help you protect against downside in the stock market, while preserving your opportunity to bank profits for the long-term.

Further, it's the secret to how our portfolio management team at Motley Fool Pro expects to make money in all types of market environments. By hedging and judiciously employing tools such as currency and commodity ETFs and options, investors can avoid volatility and profit regardless whether the market is down, flat, or up.

If that's an approach you'd like to learn more about (and who wouldn't in these volatile times), simply provide your email address in the box below.