Japanese Stocks - Where to Start?

[Ballinvarosig Investors]

I'm intending on doing some research into Japanese stocks, however Google isn't being too helpful. Have any of you clever folks dabbled in the Japanese stock market, and if so, what resources do you use to drum up ideas? I'd be particularly interested in getting new lows lists, some sort of filter screens and any other goodies that can help you dig out bargains. Other than cursory glances at the likes of Sony, Nintendo and Toyota; I don't have the first clue about Japanese stocks, so any thoughts/tips/advice would be great.

 

Thanks!

[ubuy2wron]

The Cundill Value Fund are deep value investors they have been investing in Japan for 30 plus years. I would start by kicking the tires on some of their Japanese positions. Lazy mans way I know but then I'm lazy.

[twacowfca]

The Cundill Value Fund are deep value investors they have been investing in Japan for 30 plus years. I would start by kicking the tires on some of their Japanese positions. Lazy mans way I know but then I'm lazy.

 

 

The lazy man's way to riches!  :)

[manualofideas]

We looked at some Japanese stocks last year. This may help you get up to speed quickly on a few companies.

http://manualofideas.com/files/content/pmr200902_japan.pdf

[SharperDingaan]

 

Keep in mind that Japanese financial ratios are not directly comparable to US ones, unless you make significant BS adjustments for the cultural holding coy structure. 'Actual' ROE is often a little higher than it appears.

 

SD

[BargainValueHunter]

http://seekingalpha.com/article/295747-are-japanese-businesses-worth-more-dead-than-alive

 

For the past three summers, the authors have taught a course on value investing at the University of California, Davis Graduate School of Management. The students wrap up the class by submitting their top investment picks to a year-long portfolio contest. Given the relative abundance of investment opportunities in the US in 2009 and even 2010 to a lesser extent, the students focused their search on domestic markets. Fortunately enough, the relatively fertile hunting grounds in 2009 and 2010 afforded 85% of the students’ portfolios to outperform the market averages over the course of the competition (handily, in fact). Given the lack of quality domestic investment ideas (largely due to 2011’s higher share prices), the students focused their search on a cheaper market: Japan.

 

 

A study made under the authors' direction (covering some 3,700 stocks traded on the Japanese exchanges), found 512 stocks selling for less than net current asset value (includes long-term investments) and 212 selling below ⅔ of net current asset value (Graham’s famous “66% net-net” threshold). Equally interesting, 763 of the businesses were selling for less than cash plus short and long term marketable securities. Suffice it to say, there are large parts of the Japanese market selling for extremely cheap.

[oddballstocks]

I have bought Japanese net-net stocks and still hold a few.  I've also posted some research on some of them on my blog at http://oddballstocks.blogspot.com

 

There was a thread floating around here for a while about Japanese net-nets where I had posted a bunch of direct links, here is the thread: http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=4325.0

 

Mentioned in the thread is the Japan Company Handbook which is like a Moodys for Japan, here is a link to purchase the latest English version: http://www.toyokeizai.net/shop/magazine/jch/

[seshnath]

I have bought Japanese net-net stocks and still hold a few.  I've also posted some research on some of them on my blog at http://oddballstocks.blogspot.com

 

There was a thread floating around here for a while about Japanese net-nets where I had posted a bunch of direct links, here is the thread: http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=4325.0

 

Mentioned in the thread is the Japan Company Handbook which is like a Moodys for Japan, here is a link to purchase the latest English version: http://www.toyokeizai.net/shop/magazine/jch/

What do you think of monex group?

[oddballstocks]

seshnath,

 

    I don't really know much about the monex group, I pulled up their financials on FT.com but haven't looked deeply, I'll dig in later today.  I did notice that before 2010 their FCF was greater than the current market cap.  If they can get close to that level they will throw off enough cash to go private every single year, Japan is indeed cheap!

 

For all others here is a great article "Is Japan worth more dead than alive?": http://seekingalpha.com/article/295747-are-japanese-businesses-worth-more-dead-than-alive

[schin]

I know Monhish Pabrai mentioned he is into some Japanese stocks, but not sure what. He is finding some great values there.

I know Marty Whitman have found some great Japanese REITs with some Class-A properties.

 

I invested in some Hong Kong stocks, but doing it in Pink Sheets (OTC) was always a killer to control the commission and spread.

 

Has anyone found any lucky in Japanese stocks? ADRs?

[turar]

Are you guys reading their websites/presentations/reports through online robot-translators, or asking somebody human to translate?

[watsa_is_a_randian_hero]

anyone look at Kinki Sharyo Co (TSE:7122)?  Trading for near cash value.  I'd be interested in hearing from anyone familiar with this company.

[seshnath]

seshnath,

 

    I don't really know much about the monex group, I pulled up their financials on FT.com but haven't looked deeply, I'll dig in later today.  I did notice that before 2010 their FCF was greater than the current market cap.  If they can get close to that level they will throw off enough cash to go private every single year, Japan is indeed cheap!

 

 

I looked at them during the Fukushima troubles.  It stood out because of the earnings.  I initiated a small position back then and has gotten a little cheaper on OTC ever since.  Also, recently according to their press release, they bought back about 6% of their stock about 3 months ago.  They have cut the interim dividend though.  (I am not pitching the stock; just sharing some info.)

[Green King]

 

Keep in mind that Japanese financial ratios are not directly comparable to US ones, unless you make significant BS adjustments for the cultural holding coy structure. 'Actual' ROE is often a little higher than it appears.

 

SD

 

What is the “cultural holding coy structure  ” ?

[oddballstocks]

I'm not SharperDingaan but I know what he meant so I'll reply..

 

In many Japanese companies there is a holding company with many different sub companies, often sub companies will own pieces of each other, or other holding companies creating this enormous mess of cross holdings.  It was often a common business practice to buy shares of suppliers as an act of confidence, so Toyota might own pieces of its suppliers, and the suppliers part of Toyota.

 

This was a big problem for years but has slowly gone away.  When I started looking at Japanese stocks I was concerned about factoring this out.  I dug in and found some research by Michael Porter in the book Can Japan Compete where as of 2000 only 9% of Japanese companies had cross holdings.  He had a nice table in there showing how the percentage was on a steep decline from the 60s and 70s.  I would highly recommend this book for anyone interested in investing in Japan.

[Green King]

I'm not SharperDingaan but I know what he meant so I'll reply..

 

In many Japanese companies there is a holding company with many different sub companies, often sub companies will own pieces of each other, or other holding companies creating this enormous mess of cross holdings.  It was often a common business practice to buy shares of suppliers as an act of confidence, so Toyota might own pieces of its suppliers, and the suppliers part of Toyota.

 

This was a big problem for years but has slowly gone away.  When I started looking at Japanese stocks I was concerned about factoring this out.  I dug in and found some research by Michael Porter in the book Can Japan Compete where as of 2000 only 9% of Japanese companies had cross holdings.  He had a nice table in there showing how the percentage was on a steep decline from the 60s and 70s.  I would highly recommend this book for anyone interested in investing in Japan.

 

Thanks For Your explanation.  :D

[Hoodlum]

Has anyone been following the Olympus story over the past couple of days.  Stock is down 40% since the President and CEO was asked to leave.  He has sent Financial and Audit documents to UK's SFO for further investigation.

 

http://www.ft.com/intl/cms/s/2/87cbfc42-f612-11e0-bcc2-00144feab49a.html#axzz1bA6mlmiV

 

In a statement announcing his dismissal, Olympus said Mr Woodford had diverged “from the rest of the management team” and this was ”causing problems for decision making”.

 

The dismissal represented an abrupt reversal. When promoting Mr Woodford to chief executive two weeks ago, Tsuyoshi Kikukawa, chairman, said he was “extremely pleased” with the Briton’s leadership, which had “exceeded my expectations”.

 

Mr Woodford stressed that he had seen no evidence that Olympus executives benefited improperly from the acquisitions. But he said large amounts of money seemed to have “disappeared” into the hands of poorly vetted outside financial advisers and investment vehicles.

 

In a letter to Mr Kikukawa dated October 11, he described “a catalogue of calamitous errors and exceptionally poor judgment which … has resulted in the destruction of shareholder value of $1.3bn.”

 

In the Gyrus case, the documents show that Olympus paid $687m to a Cayman Islands-registered company, AXAM, that had been named as a financial adviser but whose ultimate owners were never ascertained by Olympus. The company disappeared from the trade register three months after receiving its final payment from Olympus, Mr Woodford said. The amount paid represented about a third of the $2.2bn acquisition price.

 

http://www.bloomberg.com/news/2011-10-18/olympus-says-fees-paid-over-gyrus-purchase-were-appropriate-.html

 

Olympus Corp. (7733) said acquisition fees paid to unidentified advisers amounting to 30 billion yen ($391 million) were not excessive and followed “appropriate” accounting procedures.

 

“Investors expected that management would deny everything but in fact the chairman started to admit things,” Yuuki Sakurai, president at Fukoku Capital Management Inc., said in a phone interview. “Only the numbers are different. They admitted the payment even though several years ago they didn’t disclose it. It makes you wonder if there’s more out there.”

[Hoodlum]

Here is a copy of the letter from then President and CEO, Michael Woodford to Chairman, Tsuyoshi Kikukawa on Oct 11th.  Woodford suggested meeting on the 14th to discuss next steps.  That was the day he was sacked.

 

http://graphics8.nytimes.com/packages/pdf/business/20111018/letter-text.pdf

 

"In putting the company first, the honourable way forward would be for you and Mori-san to face the consequences of what has taken place, which is a shameful saga by any stretch of the imagination. It is clear that the current situation is now untenable and to move forward positively the necessary course of action is for you both to tender your resignations from the Board. This approach would allow the situation to be managed in a discreet manner and minimise the reputational damage to both Olympus and yourselves. If your resignations are not forthcoming, then there is a principal obligation upon me in respecting my fiduciary duties, to raise, with the appropriate parties, my fundamental concerns in relation to the governance of the company."

[Hoodlum]

Olympus is really looking stupid.  I am surprised for company with the history and size of Olympus.

 

Olympus Backtracks on Gyrus Adviser Fee, Says Amount Double

[Hoodlum]

It'll be interesting to see if this forces improved corporate governance in Japan.

 

http://www.reuters.com/article/2011/10/18/olympus-board-idUSL3E7LI2G120111018

 

The lack of independent directors supervising management is one of the key factors behind Japan's No. 36 ranking out of 39 countries on corporate governance in the latest survey by research firm GMI .

 

Other propagators of poor governance include cross-shareholdings with business partners and a tendency for executives to hang on wielding influence in advisory posts even after they've retired from the board.

 

The Olympus case may give the impression that governance is moving backwards, despite a series of steps aimed at improving the situation in recent years, including the Tokyo Stock Exchange's requirement from this year that all companies have at least one independent director or auditor.

 

"This is a negative step for corporate governance in Japan," said Jamie Allen, secretary general of the Asian Corporate Governance Association based in Hong Kong.

 

"There had been some hope that Japanese companies would take on not just outside directors but outside managers and that corporate cultures in Japan would be more open and international."

 

 

[BargainValueHunter]

Does anyone here think that the Yen is due for a major fall?

 

If so, the exporters would certainly benefit.

 

This is Brooklyn's write-up from May on Sony but in light of the recent dollar strengthening it may be good to review:

 

http://brooklyninvestor.blogspot.com/2012/05/deconstructing-sony-some-of-parts-have.html

 

So, we have total asset value of the three segments we looked earlier of 1.0 - 1.35 trillion, cash (excluding financial segment) of 719 billion yen and 1.4 trillion of total debt and other liabilities (not total liabilities; just the accrued pension and severence).

 

If we are generous, like many valuation models are out there, we can give full value to the cash.  In that case, the "stub" value of the rest of Sony (games, TV, audio/visual, computers etc...) would be:

 

Three segments value:    1.2 trillion (mid-point of 1-1.35 trillion yen range)

Cash:                                719 billion yen

Total:                              1.9 trillion yen

less total debt and liabilities:    1.4 trillion yen

                                        500 billion yen

 

With around 1 billion shares outstanding, that comes to 500 yen/share.  So the above three profitable business plus cash less debt equals 500 yen/share.

 

With Sony stock trading at around 1,100 yen/share, the value of the rest of the businesses is 600 yen/share.

 

I just don't see how Japan can stuff its citizens with even more JGBs as they are aging very rapidly and have very little immigration.

 

[oddballstocks]

Perfect timing for this thread to come back to life. I purchased the Japan Company Handbook that I mentioned on page one. I also have a list of 400 or so net-nets in Japan.

 

In the handbook I'm looking at every JASDAQ and Mothers listing. I've looked at 500+ with another 600 or so to go. It's very quick. I'm looking for low P/B high FCF yield, no debt, positive retained earnings etc. The criteria is strict but I'm finding plenty of matches.

 

That said just eyeballing the Tokyo and Osaka stuff looks a lot cheaper. Osaka stocks are really cheap. My plan is to take the list of the ~400 net-nets then look each up in the handbook and find the gems.

 

To head off potential questions of why do this manually....looking at TONs of companies gives one a great overview of the market. I have a rough feel for how investors in Japan price stocks. ROE is king, an ROE above 20% and the stock trades well above book and with a high earnings multiple. Even spending a few seconds looking at these companies I'm getting a good feel.  The book is nice because sometimes there's a key detail in the summary that I'd have to spend 30m googling for, or I might never find it. I've seen a few times the line "management is hungry for acquisitions", that's a pass for me, I might never quite translate that correctly if I was doing all my research online.

 

I've done this with other markets (New Zealand, Portugal, Kenya, Rwanda) and the results have been great.

 

One JASDAQ net-net I like and recently purchased is Odawara Engineering. Sales and earnings have been growing, business is getting better yet they still trade in the dumps.

 

 

[frith2012]

Oddball-  I've done a similar exercise with the Value Line standard edition as well as the small/mid cap edition and had great results.  Do you know if there are similar services to Value Line/The Japanese Company Handbook in some of the countries you mentioned?  Thanks!

[MrB]

Hurdle 1 - http://www.youtube.com/watch?v=JUc8-GUC1hY&feature=youtu.be

Hurdle 2 - http://ajw.asahi.com/article/economy/business/AJ201212210055 Then would higher inflation lead to higher interest rates and how does it affect its ability to service its debt load?

Hurdle 3 - Flows out of 1 & 2. Do you hedge out the currency?

Hurdle 4 - I'm loosely translating Chris Browne's view (from Tweedy). Japanese view a company as a trust. The main aim is to pass on the keys/assets. It is not to maximize value for shareholders.

Hurdle 5 - Do you really get a marginal risk/return advantage when compared to companies like AIG/BAC/FFH/MKL/BRK/LUK/WDC etc, etc where you get P/BV from 50%-110% and PEs from 4-12 with very little currency risk, risk of a bond crisis and proven shareholder friendly managements?

 

Worth considering.

[oddballstocks]

MrB,

 

Are you avoiding US investments due to the fiscal cliff or the $69T in total obligations (unfunded pensions etc) to our $16T in GDP.  The US has onerous problems just like Japan but we keep most off the books.  I think we'd both agree that a liability both on or off the books is still a liability.

 

This isn't an attack or anything, I'm genuinely curious.  This is something I consider, should I be worried about my Dollar holdings?  If we look at the fiscal problems Japan's having and their predicted outcome a similar story could be painted about the US. 

 

Another thought worth considering, Japan has almost no unemployment.  I'm willing to wager that almost every US senator and congressperson would double our debt to have the same unemployment that Japan has.  Just food for thought.

 

In every part of the world there's risk, there's the macro risk in Europe, there's risk in the US, there's the house bubble in Canada, the China bubble.

 

As a value investor I'm looking at companies first not markets first.  The companies in Japan are priced as if it would be better if the whole of Japan completely closed up shop.  Japan's companies are already factoring in the fiscal destruction of whatever fate they might have, whereas US ones are not.  I'd argue that even Europe isn't all that cheap for their problems.  So if Japan does implode do companies go from 50% of BV to 10% of BV, or 1% of BV?  What's a good price?  I'm obviously concerned at some level about macro as well, I don't want to lose my money.  But I'm also not letting the macro drive my investment decisions, I know myself, I'm not a macro investor, I can analyze companies but not economies.

 

Just a thought experiment.  The market is saying that Japanese companies should liquidate, they are destroying shareholder value.  Yet Japan is a critical element in the global supply chain, and holds valuable assets and IP.  What if Japan did just close up, who would be affected?  Could US companies continue to function if there was no Japan? 

 

I'm obviously concerned about losing my money, not just in Japan but everywhere.  I have hedged my Yen exposure on and off since investing over there.  Right now I'm exposed, but I'm considering buying some deep out of the money puts, a sort of catastrophe insurance.