A Pick for the Next Yen Freefall
Bank of Japan officials are planning to jumpstart their devaluation of the currency after the Cyprus debacle derailed their last move, and this is one stock that stands to benefit from these policies, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
It’s more accurate to think of Mitsubishi UFJ Financial Group (MTU) as a securities portfolio rather than a bank right now. And from that perspective, Mitsubishi UFJ is likely to be one of the biggest beneficiaries of the downward trend in the yen that I expect to resume as soon as the financial markets move past the chaos that is Cyprus.
For an indication of what the weak yen does to the income statement at Japan’s biggest bank, just take a look at the February 1 report of third-quarter earnings. Third-quarter profit doubled as the rally in the Tokyo stock market, based on a falling yen, led to higher fee income and smaller stock portfolio losses.
That doubling in earnings came even though as a bank, Mitsubishi’s business continued to lag. Income from lending—a core bank business, no?—fell by 7.8%, for example. Making up for that weakness was a big reduction in impairment charges on the bank’s equity portfolio—Japanese banks typically take big equity positions in the companies they lend to—and an increase in earnings from the bank’s brokerage unit.
Impairment charges from the bank’s shareholdings dropped to 90.9 billion yen ($965 million) in the nine months that ended on December 3. That was a 41% drop from the same period a year earlier, and down from 174 billion yen in the first six months of 2012.
Earnings at the company’s brokerage business, Mitsubishi UFJ Securities Holdings, rebounded to a ten billion yen profit from a loss of 12 billion yen in the year-earlier quarter.
With the Bank of Japan signaling that it will announce aggressive moves to weaken the yen at its April 3 meeting, I think we’re likely to see a resumption of the rally in Japanese stocks. That market has stalled as turmoil in the Eurozone has caused a flight to safety in the yen that stopped the decline of that currency.
Japan’s big banks give you broad-based exposure to any upward move in Japanese equities. Any of Japan’s Big Three banks can do the job in your portfolio.
I prefer Mitsubishi UFJ because the ADR trades with a 1.2 million unit average daily volume in New York. That gives it better liquidity—easier entrances and exists—than the ADRs of Sumitomo Mitsui (SMFG, with 670,000 unit volume) or Mizuhi (MFG, with 530,000 unit volume.)
I’m not looking to hold Mitsubishi UFJ for any longer than the yen decline continues. I’m adding the ADR to my Jubak’s Picks portfolio today with an initial target price of $7.10, about 22% above Tuesday's $5.92 New York close.
I’d re-evaluate policy at the Bank of Japan if the ADR gets to that level—or if it looks like the yen’s downward trend has stalled—to see how much life there is left in the falling currency.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.