Can These Japanese Stocks Help You Get Rich?

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The world’s third largest economy is recovering from contraction. The Japanese government implemented a stimulus plan that prompted the Nikkei 225 Stock Average to rise by about 30%. Should foreign investors jump into Japanese stocks?

Easing monetary policy has been cited as the driver for improvements in many Japanese companies. Yes, it makes Japanese exports cheaper, but conversely monetary easing will also make their imports more expensive, and could lead to inflation in a highly indebted economy. American investors should be very picky when selecting Japanese stocks. They should restrict themselves to companies that are trading at bargain price multiples. They should also avoid Japanese stocks that are the most sensitive to macroeconomic factors.

At today’s prices, Sony (NYSE: SNE) is the most compelling Japanese stock available to U.S. based retail investors.  But let's talk about banks first. 

Japan megabank relief

Quarterly profits of Japan’s three megabanks increased greatly, with Mitsubishi UFJ (NYSE: MTU) leading the pack with net income of about 242 billion yen ($2.6 billion). Sumitomo Mitsui doubled its profits, and it is expected to report the highest ever annual income by year end, while Mizuho’s earnings rose from about 16 billion yen ($173 million) to 207.5 billion yen ($2.24 billion). SMBC Nikko Securities analyst Shinichiro Nakamura added that the pledges by Prime Minister Shinzo to improve the economy saw stockholding losses reduce and fee income increase. According to Nakamura, “Whether or not the banks’ profit growth is sustainable hinges partly on Japan’s monetary easing and economic stimulus.”

Shares of Mitsubishi UFJ have yet to stabilize, or show a constantly increasing trend even with the impressive quarterly results. Income from commissions and fees went up by 8.5% while the trading of government bonds and securities rose by 22%. Net income exceeded estimates by analysts and it is partly attributed to the rebound of the brokerage business. The Securities section reported 10.1 billion yen ($109 million) in profits compared to a 12.3 billion yen ($133 million) loss a year earlier. Mitsubishi UFJ is currently the largest lender in Japan based on market value.

SMB Nikko Securities, a unit of Sumitomo, also rebounded, and its profits contributed to Sumitomo’s 219.4 billion yen ($2.37 billion) income in the third quarter. Government bonds and other securities brought in about 107 billion yen ($1.15 billion) while commissions and fees rose by about 13%.

Mizuho also benefited from an improvement in its brokerage unit. The unit posted 1.1 billion yen ($12 million) in profits yet it had reported a loss of about 36 billion yen ($39 million) the previous year. Commissions and fees rose by 19% while trading incomes saw a 13% increase.

Combined share losses of the megabanks decreased and their net income in general exceeded estimates by analysts. Industrial production is at the highest level in 18 months and this is expected to boost the general economic performance. The domestic lending faction has improved considering that lending by Japan city banks and regional banks has increased by about 1.4%. It is not clear if the profits by the megabanks will continue to rise but any pledges made by the government seem bound to directly affect the performance of the banks.

Sony's restructuring moves

Sony's recent sale of an office building in Tokyo for 111.1 billion yen ($1.2 billion) underscores the company's aggressive push for wider restructuring moves. According to a statement by the company, the sale netted a 40 billion yen ($442 million) gain, which will be recorded in its fourth quarter financials.

According to the statement, "Sony is transforming its business portfolio and reorganizing its assets in an effort to strengthen its corporate structure. This sale was conducted as a part of this reorganization." This latest sale came quickly after Sony agreed to sell an office in New York for $1.1 billion. These recent moves will greatly help the financially strained electronics giant as it improves its business model. Sony posted third quarter 2012 revenue of $20.84 billion, but still showed a net loss of $115 million. 

Panasonic's surprise profit

A weaker currency helps Sharp, Panasonic (NASDAQOTH: PCRFY), and Sony compete against Korean competitor Samsung. It seems as though Japan’s TV makers, might be on the road to recovery. Panasonic posted net income of 61.3 billion yen ($665 million) for the quarter ended December 31, above expectations of a 17 billion-yen loss ($181 million). Sharp had a 2.6 billion yen ($27.8 million) operating profit of for the same period, its first positive operating profit after consecutive losses for five quarters.

Iwai Cosmo Holdings analyst Mitsuo Shimizu said, “The situation for exporters is getting better with the yen’s recent weakness as a tailwind.” He also said that Japanese automakers are competitive, and would benefit from recent currency movements. 

The bearish view on Japanese stocks

Since cheaper currency seems good for exports, what’s bad about that? As the Yen weakens, the assets of Japanese companies will be cheaper to foreigners, including stock. If your stock is worth the same amount in Japan to a Japanese investor, it would be worth less to you as a foreigner, who counts returns in a depreciating foreign currency. We aren’t seeing this yet, because everyone is focused on exports.

We could try to figure out which stocks would benefit from a weaker yen. Inflation favors firms by yen-denominated, fixed-rate bonds and real assets, say a highly-levered commodity producer.  I think that this is nuts; I can’t get behind this strategy. In general, value investors advocate finding firms with low financial leverage, instead of making macro bets.

In contrast, inflation should harm Japanese banks, since they lend long and borrow short. This is the opposite of what we have seen, because their stock holdings have jumped up. These banks are toast if the Japanese stock market does not outpace inflation.

Valuation

Many Japanese stocks trade at low price-to-book ratios:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> </tr> <tr> <td> <p><span>MTU</span></p> </td> <td> <p><span>Mitsubishi UFJ Financial</span></p> </td> <td> <p><span>183.67</span></p> </td> <td> <p><span>2.76</span></p> </td> <td> <p><span>0.58</span></p> </td> <td> <p><span>4.18</span></p> </td> </tr> <tr> <td> <p><span>NTT</span></p> </td> <td> <p><strong>Nippon Telegraph & Telephone</strong></p> </td> <td> <p><span>10.86</span></p> </td> <td> <p><span>0.51</span></p> </td> <td> <p><span>0.62</span></p> </td> <td> <p><span>0.54</span></p> </td> </tr> <tr> <td> <p><span>SNE</span></p> </td> <td> <p><span>Sony</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.2</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>0.69</span></p> </td> </tr> <tr> <td> <p><span>IX</span></p> </td> <td> <p><strong>ORIX</strong></p> </td> <td> <p><span>13.45</span></p> </td> <td> <p><span>1.12</span></p> </td> <td> <p><span>0.77</span></p> </td> <td> <p><span>3.18</span></p> </td> </tr> <tr> <td> <p><span>SMFG</span></p> </td> <td> <p><span>Sumitomo Mitsui Financial</span></p> </td> <td> <p><span>7.44</span></p> </td> <td> <p><span>3.01</span></p> </td> <td> <p><span>0.88</span></p> </td> <td> <p><span>2.38</span></p> </td> </tr> <tr> <td> <p><span>NMR</span></p> </td> <td> <p><span>Nomura Holdings</span></p> </td> <td> <p><span>43.85</span></p> </td> <td> <p><span>1.05</span></p> </td> <td> <p><span>0.9</span></p> </td> <td> <p><span>4.28</span></p> </td> </tr> <tr> <td> <p><span>MITSY</span></p> </td> <td> <p><span>Mitsui & Co.</span></p> </td> <td> <p><span>6.65</span></p> </td> <td> <p><span>0.49</span></p> </td> <td> <p><span>0.97</span></p> </td> <td> <p><span>1.5</span></p> </td> </tr> <tr> <td> <p><span>KYO</span></p> </td> <td> <p><strong>Kyocera</strong></p> </td> <td> <p><span>29.21</span></p> </td> <td> <p><span>1.29</span></p> </td> <td> <p><span>0.99</span></p> </td> <td> <p><span>0.02</span></p> </td> </tr> <tr> <td> <p><span>MFG</span></p> </td> <td> <p><span>Mizuho Financial</span></p> </td> <td> <p><span>7.34</span></p> </td> <td> <p><span>3.31</span></p> </td> <td> <p><span>1.07</span></p> </td> <td> <p><span>14.56</span></p> </td> </tr> <tr> <td> <p><span>DCM</span></p> </td> <td> <p><strong>NTT DOCOMO</strong></p> </td> <td> <p><span>12.57</span></p> </td> <td> <p><span>1.37</span></p> </td> <td> <p><span>1.09</span></p> </td> <td> <p><span>0.05</span></p> </td> </tr> <tr> <td> <p><span>KNM</span></p> </td> <td> <p><strong>Konami</strong></p> </td> <td> <p><span>13.35</span></p> </td> <td> <p><span>1.02</span></p> </td> <td> <p><span>1.15</span></p> </td> <td> <p><span>0.16</span></p> </td> </tr> <tr> <td> <p><span>PC</span></p> </td> <td> <p><span>Panasonic</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.23</span></p> </td> <td> <p><span>1.17</span></p> </td> <td> <p><span>0.69</span></p> </td> </tr> <tr> <td> <p><span>HMC</span></p> </td> <td> <p><strong>Honda Motor</strong></p> </td> <td> <p><span>17.31</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>1.35</span></p> </td> <td> <p><span>0.98</span></p> </td> </tr> <tr> <td> <p><span>TM</span></p> </td> <td> <p><strong>Toyota Motor</strong></p> </td> <td> <p><span>19.58</span></p> </td> <td> <p><span>0.75</span></p> </td> <td> <p><span>1.35</span></p> </td> <td> <p><span>1.15</span></p> </td> </tr> <tr> <td> <p><span>NSANY</span></p> </td> <td> <p><strong>Nissan Motor</strong></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.45</span></p> </td> <td> <p><span>1.5</span></p> </td> </tr> <tr> <td> <p><span>CAJ</span></p> </td> <td> <p><strong>Canon</strong></p> </td> <td> <p><span>17.31</span></p> </td> <td> <p><span>1.26</span></p> </td> <td> <p><span>1.56</span></p> </td> <td> <p><span>0.01</span></p> </td> </tr> <tr> <td> <p><span>NJ</span></p> </td> <td> <p><strong>Nidec</strong></p> </td> <td> <p><span>16.62</span></p> </td> <td> <p><span>1.11</span></p> </td> <td> <p><span>1.76</span></p> </td> <td> <p><span>0.78</span></p> </td> </tr> <tr> <td> <p><span>MKTAY</span></p> </td> <td> <p><strong>Makita</strong></p> </td> <td> <p><span>17.94</span></p> </td> <td> <p><span>1.96</span></p> </td> <td> <p><span>1.77</span></p> </td> <td> <p><span>0.01</span></p> </td> </tr> <tr> <td> <p><span>KUB</span></p> </td> <td> <p><strong>Kubota</strong></p> </td> <td> <p><span>21.67</span></p> </td> <td> <p><span>1.3</span></p> </td> <td> <p><span>2</span></p> </td> <td> <p><span>0.61</span></p> </td> </tr> </tbody> </table>

Sony is the most interesting candidate stock on this list. It trades at low price-to-sales and price-to-book ratios and is not a Japanese financial company. It is safer and cheaper than many other stocks on this list.


BillEdson11 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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