Japan, Inc. on Sale - At Double-Discounts/How to Play Post-Disaster Currency Moves in Japa

Big and (Mostly) Unloved

Most of these companies, which are among the biggest in Japan, have been out of favor with investors over the past five years

Recent % Change
Company/Ticker Price YTD* 5 Yrs*
Toyota/TM $82.06 4.36% -24.16%
Mitsubishi UFJ Financial/MTU 4.66 -13.86 -67.73
NTT DoCoMo/DCM 17.89 2.70 18.95
Hitachi/HIT 50.75 -4.87 -27.23
Honda Motor/HMC 38.86 -1.62 27.66
Canon/CAJ 43.85 -14.59 2.37
Nippon Telegraph & Telephone/NTT 22.69 -1.09 0.31
Sumitomo Mitsui Financial/SMFG 6.45 -9.28 -68.99
Mitsubishi/MSBHY 51.90 -3.08 16.50
Nissan Motor/NSANY 18.31 -3.43 -21.48
Tokyo Electric Power/9501.Japan ¥798 -59.76 -74.29
Takeda Pharmaceutical/4502.Japan 3725 -6.76 -45.38
Nintendo/NTDOY $33.33 -8.26 81.14
Mizuho Financial/8411.Japan ¥135 -11.76 -85.29
Sony /SNE $31.40 -12.07 -32.89
Japan Tobacco /2914.Japan ¥320500 6.66 -25.12
Mitsui & Co/8031.Japan 1340 -0.07 -14.32
Panasonic/PC $11.86 -15.89 -46.33
East Japan Railway/9020.Japan ¥4405 -16.57 -48.96
KDDI/9433.Japan 504000 7.46 -16.00
Seven & I Holdings/3382.Japan 1973 -9.08 -55.16
Tokio Marine/TKOMY $27.50 -7.09 -29.78
Shin-Etsu Chemical/4063.Japan ¥3660 -16.82 -40.58
Nippon Steel/5401.Japan 243 -16.78 -46.94
Kansai Electric Power/9503.Japan 1994 -0.50 -27.75
JFE Holdings/5411.Japan 2170 -23.27 -50.68
*Through March 17. In local currencies. Source: Bloomberg

In the short run, Japan's economy seems sure to slow down. Indeed, this year it could shrink, versus the BOJ's pre-earthquake forecast of a 1.6% increase in real economic output. Nomura Securities last week cut its forecast to 1.1% from 1.5%. Namie Koyanaka, chief of Tokyo Financial Research Co., publishes a weekly report compiled by prominent Japanese economists and former policy makers. In the immediate aftermath of the catastrophe, the group wrote that it expected 3% economic growth for the year. Later in the week, Koyanaka acknowledged, "We have to extend the period" forecast for the rebound. "Two to three quarters ahead, Japan will start recovering," she continued. "But it's difficult to say how long the panic will last."

Over the longer term, the disaster could actually add to economic growth as Japan spends money to rebuild the devastated areas, which account for 7% of Japan's economy and a large part of its land mass. Mohamed El-Erian, chief executive of Pimco, sees the catastrophe possibly causing Japan's economy to contract this year. "If we don't have a full bounce in electricity generation this year, there's a possibility they don't print a positive number," he says

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EPA/Asahi Shimbun/Landov

Earthquake/tsunami aftermath.
Japan_Familyjp
Japan_Familyjp

. "But they will print a very large number in 2012, something like 5% to 8%."

Some of Japan's most attractive stocks are those of world-class export companies. Many had facilities near Sendai, but their huge international business makes them less dependent on Japan itself. Sony for example trades at 0.87 times book value. (It should be noted that many Japanese companies' return on equity is relatively low, reducing their price-to-book value.) Canon had factories that reported damage and suspended production as a result of power failures. Down 14.6% so far this year, Canon trades at 1.64 times book and 14 times earnings.

Both Toyota Motor and Nissan had facilities and suppliers in the region that will be affected by rolling blackouts. Nissan sells for 1.1 times book and 8.4 times earnings. Toyota, which has had its own problems, sells for book value and 14.3 times earnings.

Among those likely to benefit from the reconstruction are the steel giants. JFE Holdings, down 23.3% this year, trades at 0.83 times book.

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JIJI PRESS/AFP Newscom

Rescue workers
Japan_Rescuejp
Japan_Rescuejp

The slowdown will hit the top line for companies, though the picture is still blurred. Analysts tweaked forecasts lower last week. Before the disaster, earnings revisions were on the rise, suggesting companies were weathering the strong yen and had rebounded from the 2009 recession. For the four quarters ended December, Japan's Finance Ministry reported, corporate pretax profits rose 27% as sales climbed 4.1%. At the start of this week, Morgan Stanley MUFG was forecasting 18.5% corporate earnings growth for 2011 and 22.4% growth for 2012. Apply a haircut of 25%–the amount some economists are pruning from their GDP forecasts–and you get still-respectable growth of 13.9% and 16.8%.

Japan, Inc. on Sale - At Double-Discounts
11 comments | by: Joseph L. Shaefer March 15, 2011 | about: JEQ, JOF
There is no guarantee that frightened investors won’t continue to sell off Japanese companies. That's one reason not to buy Japanese firms right now. And there are two additional reasons.

First, their extraordinary expenses are unknown at this point. One company may have had insurance from various carriers that will cover 80% of their losses from lost revenue and the costs of rebuilding. Another may be 100% self-insured and will take a larger hit to their earnings.

Second, we don’t know what revenue they will lose to competitors in other nations who will now benefit from this calamity by rushing to replace Japanese suppliers in the global markets. Already we see a number of other nations’ semiconductor companies moving up as the Japanese semiconductor industry has been particularly hard hit by the earthquake, the tsunami and the environmental hazards that make customers question the quality of the product they can produce in the short term.

So – we have a potential triple whammy: investor caution, which may keep the stock prices of Japanese companies down no matter what the actual companies do; lost revenue and great expense to rebuild what has been destroyed; and the displacement effect that comes when a supplier is seen as a possibly less secure source of product.

On the other hand… Japan will rebuild. From the rubble of WWII, the country rebuilt. From previous natural calamities, Japan rebuilt. Even from the devastating Kobe earthquake of 1995, the country rebuilt. As it does, its factories will be newer, processes more technologically advanced, and even its nuclear reactors – assuming common sense and public opinion agree – will be of the newer designs that, for instance, use gravity to bring water down over the fuel rods rather than the obviously troublesome current system of using ground-level pumps to push water up.

Those who take the long view, and who understand that any of the three factors above could bring share prices below that which they pay today, are also those who may benefit from purchasing Japan, Inc. at a discount. Shares are down. But there is a greater discount at play here, as well. Two closed-end mutual funds that buy Japanese companies are selling at discounts of 9% and 4%, as well. If you were to buy these closed-ends, you would be receiving a slightly larger dividend flow than you would by buying the companies directly. You’d also be buying a dollar worth of assets for 91 cents or 96 cents.

The first of these is the Japan Equity Fund (JEQ). Its Top 10 holdings are:

Mitsubishi UFJ Financial Group (MTU)

Toyota Motor Corporation ADR (TM)

Honda Motor Company ADR (HMC)

Mitsubishi (MSBHY.PK)

Mitsui Fudosan Co. (MTSFF.PK)

Nippon Telegraph and Telephone (NTT)

Tokio Marine Holdings (TKOMY.PK)

East Japan Railway Co. (EJPRY.PK)

Asahi Glass (ASGLY.PK)

Sumitomo Electric Industries (SMTOY.PK), and

JX Holdings (JXHLY.PK)

Tokio Marine and East Japan Railway may be hit harder than many others but my guess is that they have lain off much of the risk, the former via a consortium of reinsurers, the latter with insurance. What strikes me about all 10 of these companies, and the others in JEQ’s portfolio, is that they have been hit hard – but they also form the backbone of precisely the kind of companies that will provide the capital, the expertise, the tools, the materials and the heavy machinery to rebuild a shattered nation. Short term, they are being savaged. But is short term this week? This month? My belief is that the Japanese people will roll up their sleeves and get to work, just as they did in Chile when their horrible earthquake struck, and in New Zealand when their most recent quake almost leveled the beautiful town of Christchurch.

The second possibility is the Japan Smaller Capitalization Fund (JOF). As the name implies, these are smaller cap firms that are typically market leaders in certain niches. The Top 10 Holdings are not exactly household names in the US: Otsuka Corporation, Itochu Corporation (ITOCY.PK), Hitachi Chemical, Park24 Co., Yaskawa Electric Corp. (YASKF.PK), ABC-Mart, Inc., Nihon Kohden Sekisui Chemical Co., Don Quijote Co Ltd (DQJCY.PK), and Misumi Group.

Because they are not well-known names here, allow me to provide the top categories of the sectors in which they operate, directly from the website of the fund sponsor, Nomura Asset Management:

Industry Diversification


% of
Net Assets

Services


13.0

Miscellaneous Manufacturing


10.4

Information and Software


10.2

Chemicals and Pharmaceuticals


9.9

Electronics


9.4

Retail


8.6

Automotive Equipment and Parts


6.4

Banks and Finance


6.1

Machinery and Machine Tools


5.1

Real Estate and Warehouse


5.0

I hasten to add that the idea of purchasing Japanese companies now is replete with possible risk. Please see the “triple whammy” comments above! But where there is risk, there may also be opportunity for the bold. It seems to me there will be an awful lot of automobiles replaced in the coming weeks and months, a lot of steel buildings re-built, essential services restored, electronics at both the consumer and business level replaced, chemicals needed for cleanup and sanitization, and loans from banks to finance it all. Take another look at the list immediately above.

If your due diligence leads you to the same conclusions I have reached, that the Japanese people will rebuild and that they will “Buy Japanese” as they do so, then these and other quality closed-end funds may be a great tool to allow you to invest alongside them.

Disclosure: We have recently begun to purchase JEQ and JOF. We are buying more today and will continue to do so if/as they decline to even more attractive prices.


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How to Play Post-Disaster Currency Moves in Japan
8 comments | by: Keith Fitz-Gerald March 16, 2011 | about: EWJ, UDN, UUP, YCS

According to Biriniyi Associates, investors threw more than $1 billion into Japanese ETFs last month -- second only to U.S. energy funds and more than agriculture, large-caps and mid-cap stocks combined.

They couldn't have placed their bets at a worse time.

Amidst fears of multiple nuclear meltdowns, the benchmark Nikkei 225 Index plunged 10.55% yesterday (Tuesday) after a 6.2% decline on Monday -- a two-day decline of 17% since Friday's devastating 9.0-level earthquake and tsunami. More than $650 billion in shareholder wealth has been vaporized.

As a veteran trader and longtime expert on Asia, it's a story that I've heard countless times: Japan was supposed to regain what it once had -- a vibrant economy that helped lead the world in the years following World War II, and that finally achieved global dominance in the late 1980s.

Somehow, though, that never happened. But it didn't discourage the believers.

Three Views of the Rebound That Never Came

On Thursday, the day before the Sendai earthquake and tsunami, the Nikkei closed at 10,434.38. That means the index is down 73% from its record intra-day high of 38,957.44, reached Dec. 29, 1989 -- just before Japan's so-called "Lost Decade" began in earnest. (Sadly, that term should be listed in the plural -- as in "Decades," with an "s" -- given the perpetual malaise that has defined Japan's economy ever since.)

For some strategists and traders, the expected Japanese rebound was all about currencies and exports. Members of this group believed a weakening Japanese yen and China's growth would transform Japan into an exporting giant. In this role, Japan would become the supplier of choice to the newly emerging economies of the Asia region, the key one being China.

Those subscribing to this argument believed one of two scenarios would make this happen. Either the U.S. dollar was going to strengthen against the yen, or the Bank of Japan (BOJ) was going to begin printing money, which would drive the yen lower against the dollar.

A second group of believers based their expectations of a Japanese economic renaissance on mathematical probabilities and financial valuation. Japan, this group believed, was undervalued, and in a big way. The U.S. Standard & Poor's 500 Index had shot up 91% from its March 2009 bear-market lows, while the Nikkei managed to tack on only 47% through the same period (through last Thursday, the day before the earthquake). Therefore, the odds favored a continued rebound in Japan's shares, this group reasoned.

A third group of believers subscribed to what I like to call (for lack of a better term) the "coattail theory." Somehow, this island nation that is the world's No. 3 economy would finally pull itself up by the bootstraps of the global inflation that reflates all economies. This is nothing more than a variation of the "rising-tide-lifts-all-boats" theory.

My outlook for Japan has been the same for several years now, and wasn't dramatically changed by the events of last week: The country's huge debt load -- as much as 259% of GDP, depending on which statistics you believe -- will act as an anchor on its economy, meaning there are better (and less risky) places to put your money.

Absent the earthquake tragedy, Japan's economy might have managed to sputter along at 1% per year. But now, following the unprecedented $186 billion post-quake infusion by the BOJ, the country's debt load is obviously headed much higher -- and that puts both Japan's growth and its yen at real risk.

In my mind, there's no question that Japan will rebuild and its people will recover. But we can't say the same about the country's currency.

A False Rally

Many people won't agree with my analysis, especially since the yen immediately rallied to 80.60 per dollar following the earthquake -- an exchange rate that's only a stone's throw from the yen's all-time-record high of 79.75 versus the dollar, a level reached just after the Kobe earthquake (also known as the Great Hanshin earthquake) of 1995 following that earth-shaker. So this pattern is very familiar to currency traders who are definitely feeling a sense of déjà vu.

The immediately stronger yen is due partly to the expectation that Japanese companies will repatriate assets as part of the rebuilding process. It's also due to global traders adhering to the script that they always follow in the aftermath of any natural disaster or geopolitical upheaval by dumping their riskiest holdings.

Neither catalyst will last. I say this because the last thing Japan needs right now is an abnormally strong yen. Not only does this hurt the exports upon which 14% of Japan's $3.59 trillion economy is based (because it makes them more expensive for the rest of the world), but a more-expensive yen could cripple the domestic recovery efforts that will be so critical in the months to come.

That's why many experienced traders (myself included) expect the BOJ to intervene further in a yen-selling maneuver that will help shore up the Nikkei Index and free up liquidity for the country's industrial base, which is understandably traumatized by all that's happened since Friday's earthquake.

In other words, Monday's aforementioned infusion -- a policy-level response by the BOJ that was unprecedented in its quickness -- was just the start. Indeed, my sources in Tokyo's financial district told me early yesterday that the BOJ was meeting again to consider further measures -- something the media finally confirmed later in the day.

But let me caution you: This is not a trade for nervous money, or for the faint of heart. No global event ever is. The Bank of Japan has held interest rates near zero for years in a misguided attempt to jumpstart that nation's economy, so the only weapon left in its arsenal is currency manipulation. That reality makes what's happening in Japan's markets right now especially dangerous and potentially volatile, too.

Moves to Make

I fully expect short-term momentum traders who are driven by memories of the Kobe quake to make a run at 80 yen to the dollar, which would force Japan's central bank into an additional round of massive intervention.

Longer-term, though, I expect reality to settle in as global traders -- the vast majority of whom are already circling like sharks -- are drawn into the fray by weaker earnings and by what could be crippled national industries, especially if there is a serious radiation leak. That may sound opportunistic, or even callous. But that's the reality of the global capital marketplace.

Here are three ways to play the scenarios that I've outlined here:

* Short Term: Short the yen and buy the dollar. Be careful, though. There are lots of shorts to get cleared out around 80 yen to the dollar before this trade gathers momentum -- and it will take true nerves of steel to stare down the Bank of Japan.
* Medium term: Buy ProShares UltraShort Yen Exchange-Traded Fund (YCS). The 20% run-up experienced after the Kobe quake was very quick, and it's taken 15 years for the yen to revert to these levels. But that's true with so-called "blow-off" moves, in that they frequently are event-driven. This time around we'll probably see a similar pattern play out, albeit one that unfolds at a much faster pace because global financial markets are much more closely integrated now than they were 16 years ago.
* Long term: Short Japanese stocks. To do this, use something like the iShares MSCI Japan Index ETF (EWJ), or "put" options on EWJ, as your vehicle. It will take weeks, or even months, for analysts to factor in the true economic impact of the continuing catastrophe, and there are undoubtedly going to be downgrades along the way. Anybody caught holding Japanese equities in 1995 got smacked around for a year. And this time around the damage will be much

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Published March 22, 2011 | A A A
Screens by Jack Hough (Author Archive)
3 Japanese Stocks Priced to Buy

If there's a case to be made for investing in Japanese stocks it has little to do with sympathy, the recent earthquake or the relationship between prices and earnings. Compassion is better expressed with a call to the Red Cross than to Charles Schwab ( SCH ) . A 12% decline for the Nikkei 225 since the March 11 earthquake is small edamame for an index that topped 38,000 when the first George Bush was president and trades near 9,200 today. And Japan's average price/earnings ratio of about 14 based on projected 2011 earnings puts it on par with, rather than at a discount to, the U.S.

There's a key difference between the two markets, however. Following two years of American companies slashing costs and unloading idle assets, the country's corporate profits have reached record levels relative to the size of the economy. Japan's large firms have been slow to reduce bloat, so margins there remain well below average. To say that shares are similarly priced in the two countries based on earnings is to compare America at peak corporate performance with Japan in what might be its trough.

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One promising sign for Japan is that measures like profit margins and returns on assets tend to revert to industry averages over long time periods, as top performers face new competition and underperformers figure out ways to improve. Today, then, a more telling measure might be the ratio of share prices to the book value of company assets, which stands at about 1.1 in Japan, versus greater than 2 in America. Assuming Japan's companies have plenty of room to boost profits and America's have little, Japan's asset discount might signal a buying opportunity, especially among companies whose returns on assets are already improving.

Below are listed three Japanese firms that trade in the U.S., sell for close to their book values, have improving returns on assets and pay dividends.

Sony
Price/book: 0.9
Return on assets (5-year average): 0.9% (0.7%)
Dividend yield: 0.9%

Sony ( SNE: 32.28, -0.14, -0.43% ) has a hand in televisions, cameras, movie and music production, video games, banking and much else. Its stock sells for about what it fetched in 1996, when DVDs were just catching on. Efforts by chief executive Howard Stringer, installed in 2005, to cut costs were eclipsed by the recent recession, which shrank sales and led to losses. Sony has returned to profitability over the past year and according to Jay Defibaugh, who covers the stock for MF Global, it's now ready to shift its focus to new products, including a new handheld gaming device and a line of tablet computers. Other possibilities for improvement, according to Defibaugh, include the unwinding of non-core businesses like insurance and banking and the launch of a new business model for the struggling television division that uses Sony's video, games and music catalog to create a hardware-and-service offering.

Kyocera
Price/book: 1.1
Return on assets (5-year average): 6.7% (3.9%)
Dividend yield: 2.1%

Kyocera ( KYO: 96.60, -3.36, -3.36% ) makes products as different from each other as kitchen knives and dental implants. Most of its income comes from industrial ceramics, electronics components and telecom and networking equipment. Sales in recent quarters have increased by one-third on strong demand for consumer electronics, industrial equipment, cars and solar panels. According to Masaru Koshita of Barclay's Capital, who lifted his opinion of the shares to "overweight" from "equal weight" in early March, margins have greatly improved in the company's core businesses with the notable exceptions of telecom equipment and MLCCs, or multi-layer ceramic capacitors. Koshita expects a return to profitability by year's end in the former business and a restructuring of the latter, both of which could give the stock a lift.

Bridgestone
Price/book: 1.2
Return on assets (5-year average): 3.8% (2.4%)
Dividend yield: 1.1%

Bridgestone ( BRDCY ) sounds American but was founded in 1931 in Japan by Shojiro Ishibashi, whose last name translates to "stone bridge." The company makes most of its money from tires but is also known for golf balls and is dabbling in electronic paper (think Kindle, but flexible and in color). Stronger sales of cars returned Bridgestone to profitability last year, despite higher materials costs and a stronger yen, which makes Japanese exports more expensive to foreign buyers. For 2011, management projects an 11% rise in sales but a 17% decline in profits due to continued increases in material costs. Its profit estimate of 82 billion yen (about $1 billion) forecasts a net margin of just 2.6%, down from 3.5% last year. Shares sell for about 17 times that meager profit but less than eight times what the company earned back in 2005, when sales were stronger and commodity prices stable.

Read more: 3 Japanese Stocks to Buy - SmartMoney.com http://www.smartmoney.com/investing/stocks/3-japanese-stocks-to-buy-1300763435529/#ixzz1HNyTM7ot