Monday, March 21, 2011

Is Japan a Buying Opportunity?

Recently, there have been lots of calls to buy Japan equities.

Historically, I have not found equities of businesses based in Japan to be all that attractive but there is a growing chorus of those who do.

First of all, Japan's stock market reached extreme valuations in the 1980s. It has taken the past couple decades for what were extreme price to earnings multiples back then to become more reasonable. So either companies had to grow into valuations and/or stock prices had to come down.

2nd, return on equity, which historically has been pretty dismal for Japan businesses has only begun to look respectable.

Even with these improvements in valuation and return on equity, I'm still fairly lukewarm when it comes to Japan equities. The Japanese stocks on my radar just don't seem inexpensive enough to own in lieu of reasonably priced high quality companies sold on U.S. exchanges.

Still, there are those with more enthusiasm for Japan equities that think otherwise.

Here are some more bullish points of view.

David Herro, the manager of Oakmark International recently said in this Fortune interview (the interview happened before the earthquake and tsunami) why he likes Japan equities:

...in the '80s, Japan was 60% of the international index, and I had 0% invested in Japan. They used to say, "This is very risky." And I said, "What's risky is investing in Japanese companies that are trading at 60 or 70 times earnings."

Herro points out that, back then, he was seeing average return on equity was 5% in Japan but that has started to change. He added...

Low price does not mean undervalued in our view. You have to look for companies that (a) are selling cheap but (b) are committed to value creation, to doing something with their excess cash, to building book value per share, and to getting a good return on equity. And we're able to find that for the first time ever -- at least since the mid-1980s, when I started investing.

Four of Oakmark's top five holdings are in Japan.

Geoff Gannon recently wrote this very bullish article on Japan equities.

If an investor already likes a Japanese business, an extraordinary event just makes the stocks cheaper and margin of safety -- if valuation is well-judged -- that much wider. Buffett said it's going to take some time to rebuild but it doesn't change Japan's economic future in this Reuters article published early this morning.

Buffett also said he wouldn't be selling Japanese stocks as a result of this (if he owned any).

Buffett in the past has frequently expressed enthusiasm for businesses in South Korea but not those in Japan. In the Reuters article, Buffett said he'd like to buy businesses or shares of large capitalization stocks in South Korea.

Berkshire is a shareholder in South Korean steelmaker POSCO (ADR: PKX).

While Buffett has said some bullish things on Japan, at least so far the actual money he has allocated has gone into South Korea and China (though could certainly have been buying Japan in recent weeks or be buying as I write this).

In this article from Fox Business, Buffett said they are looking for large businesses to buy in any country but most likely in the United States.

Some Japanese ADRs:
  • Canon (CAJ)
  • Hitachi (HIT)
  • Honda (HMC)
  • Kubota (KUB)
  • Kyocera (KYO)
  • Nomura (NMR)
  • NTT DOCOMO (DCM)
  • Orix (IX)
  • Panasonic (PC)
  • Sony (SNE)
  • Toyota Motor (TM)
I still find plenty of high quality investment opportunities elsewhere but, at the very least, Japan equities have started to look more competitive with other equity investment alternatives.

Adam

Small position in PKX established at much lower than recent prices; no position in other equities mentioned.

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