Thursday, November 19, 2009

Rising Sun, Falling Stocks

A recent article entitled, Japan Stocks Offer Value Bargains, profiles Abhay Deshpande, manager of the First Eagle Global Fund (SGENX). Deshpande's thesis is pretty simple. He says:
After a 20-year bear market, stocks in Japan are very cheap. No other markets in the world have such an abundance of shares that are so far below their intrinsic value.
Mr. Deshpande hasn't received much validation as Japanese stocks continue to perform poorly. Everything from political uncertainty to a strong yen have been offered as possible reasons.

Nonetheless, Japanese bargains are plentiful.

This isn't the first time a value investor arrived at a party before the other guests.

A survey of my own portfolio shows that the weakest performers this year are indeed Japan-based companies. That said, I am adding to existing positions.

Many of First Eagle's Japanese holdings are mentioned in the Bloomberg article. These individual companies encompass a range of industries including:

Aioi Insurance (AIOIY)
Ariake Japan - seasoning manufacturer
Astellas Pharmaceuticals (ALPMY)
Chofu Seisakusho - boilermaker
Daiichikosho - karaoke machines
Fanuc - industrial robots (FANUY)
Keyence - sensors
Nagaileben Co. - medical clothing
Nissay Dowa General Insurance
Secom Co - conglomerate (SOMLY)

It will take time to research them all, but sadly most of these companies are hard to buy and own for US-based investors. To my knowledge, only 4 have ADR's (tickers listed).

One alternative is to buy the First Eagle Global Fund, but that's no fun. For those seeking exposure to Japanese value stocks, dilution is also an issue. First Eagle is a global mutual fund with Berkshire Hathaway, 3M, American Express, and Microsoft among its top holdings.

Good companies, but they don't exactly adhere to the Japanese theme.

Most of us are drawn to people and ideas we agree with. It is for this reason that I focused on the First Eagle article. I do very little top-down valuation work, but my bottom-up research allows me to confirm the "cheap Japan" thesis. I've found several attractive Japanese bargains, which can easily be purchased by individual investors.

In no particular order, they are:

#1 Nintendo (NTDOY) - $30.80

Nintendo has been hurt by a strong yen and weakness in the video game market. Nonetheless, it remains a dominant player in its market despite all the talk about Apple (AAPL). Cash flow is solid and debt is almost nonexistent. In addition, nearly one third of Nintendo's $35 billion market value is sitting on the balance sheet in cash. And the dividend yield is around 5%. In January, the company announced it would continue its current payout level despite current weakness thanks to boatloads of excess cash (around $12 billion). Nintendo is one of the most underresearched well-known companies around. A bonus: Excellent management.

#2 Kyocera (KYO) - $79.20

If you want a cowardly way to invest in solar, Kyocera could be your ticket. The company was founded as Kyoto Ceramics. They make the ceramic parts for solar panels and just about everything else. Need a ceramic knife? In addition, Kyocera is a conglomerate making everything from printers to cell phones.

The real attraction is the balance sheet. Cash stands at nearly $5 billion against debt of $557 million. There's also a sizable securities portfolio. Not bad for a company with a $15 billion market value. The underlying business is being hurt by a strong yen, but should still generate $4+ a share in free cash flow this year. In short, a fascinating company selling near book value.

#3 Takeda Pharma (TKPHY) - $19.67

Takeda was founded in 1781. Not sure it was a pharmaceutical company back then, but it doesn't matter. Today, this is a vibrant company selling drugs for diabetes, cardiovascular disease, and other disorders related to urology, oncology, gastroenterology, and the central nervous system.

Again, there is beauty in the balance sheet. Takeda has almost $9 billion in cash and a multi-billion dollar securities portfolio. It's like a mini Japanese mutual fund with exposure to other pharma companies, chemicals, banking, insurance, and even tires (Bridgestone). Debt is practically nonexistent meaning that over one third of Takeda's market value ($31 billion) is sitting on the balance sheet. Even before adjusting for these excess assets, Takeda trades for less than 10x free cash flow. The gross dividend yield is around 5%.

#4 Nippon Telephone & Telegraph (NTT) - $ 20.46

Last but not least is Nippon, which owns 64% of NTT DoCoMo (its wireless offspring). This stake is worth around $42 billion. That leaves a "stub" worth around $25 billion. Run the numbers and you'll find a tidy little company with steady, substantial cash flow and a solid dividend.

A friend of mine in Hong Kong had the following to say about the conservative nature of Japanese firms in general:
An American fund manager I spoke to in Japan had the perfect quote: "XYZ Company is a topnotch, first rate company that has every yen it ever earned still sitting on its balance sheet.
Certainly the companies I've discussed err on the side of holding too much excess capital. There are worse problems to have in this environment. Perhaps Japanese corporate culture needs a little shaking up, but the value is there.

In the Land of the Rising Sun, stocks should soon follow.

Disclosure: The author owns Nintendo, Nippon, and Takeda. Kyocera probably won't be far behind.


  1. Your posts are great. Talking about Japan, I used to be a buy-side analyst there, aweful management and no activists (used to be some, but quite few right now). I think just as Jean-Marie Eveillard mentioned, because of lacking activists, even there is value there, nobody will go to dig it. Then management will ignore shareholder value even more. So the Tokyo market is not very efficient. I owned a Japanese stock now trading at only 70% of its working capital (a little higher when I bought), so a typical Graham net-net stock. But management has done nothing to improve. Anyway, that's Japan.

  2. Thanks for your thoughts Warren. The companies I included in this post have shown a better than average approach in the shareholder value area. Nonetheless, your points are well taken.