If the U.S. dollar goes higher, one Jefferies analyst has made the case for investing in small- and mid-cap stocks -- particularly ones that have little overseas sales exposure.

Jefferies equity strategist Steven DeSanctis said in a note on Monday that the U.S. dollar peaked on Jan. 20 and has fallen around 8% since, during which time stocks and sectors with high foreign sales have been outperforming. A change could be afoot, though; the U.S. dollar has risen 2% in May, DeSanctis wrote.

"Since the dollar peaked back on January 20, we have seen those sectors with significant overseas exposure outperform until recently. We think we are starting to see another change in performance and with that, we think small-cap investors should tack along with the market to give themselves a better chance of outperforming," he wrote in a May 23 note to clients.

DeSanctis says small- and mid-cap domestically oriented stocks will outperform. That theory is based on several assumptions:

  • If interest rates rise, the dollar will "stabilize and may in fact regain its momentum and start to appreciate," leading domestic names to outperform.
  • A stronger U.S. economy will also boost those stocks with strong domestic exposure.
  • Volatility is rising, and domestic stocks tend to hold up better under that scenario.
  • An improving economy paves the way for marginally higher interest rates, which also favors domestic stocks over names with higher overseas exposure.
  • Domestic stocks also offer better earnings growth -- providing "better sales and earnings growth in the second quarter and this should continue for all of 2016."

DeSanctis wrote that while valuations are mixed for domestic stocks, "we think valuations matter less as volatility ramps up."

Using a screen against the Russell 2500, DeSanctis found 27 stocks that were above $2 billion in market cap; were buy-rated by Jefferies equity analysts; sat in the highest "two quintiles" of return on equity; and, finally, derive less than 20% of sales from foreign sales. Here are the 10 stocks with market caps above $5 billion on his list.