Mitsubishi Trio: Three Plays on Japan

04/17/2014 10:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Japanese equities offer investors a high-beta play on global growth—cyclical companies represent about 60% of the market's capitalization—and the Bank of Japan's efforts to drive inflation, suggests Yiannis Mostrous in Capitalist Times.

Equally important, the Nikkei Index trades at a discount to the S&P 500 (SPX) and other major indexes, giving growth-oriented investors an excellent entry point before the Bank of Japan announces its next move and stocks jump in response.

Here are some of our top ideas for investors looking to take advantage of favorable valuations and add exposure to Japan’s turnaround story.

Mitsubishi Estate (JP:8802) (OP:MITEY)

Although Mitsubishi Estate has tumbled significantly from last year’s high, the stock still remains our top play on Japan’s efforts to restructure its economy and drive inflation.

The blue-chip outfit owns and manages about 30 office buildings in the Marunouchi area, a prestigious business district near Tokyo Station. Office vacancy rates in Tokyo’s five central business districts have declined to about 7%, and this momentum should continue into the coming quarters. Rents have also started to tick up.

With a debt-to-equity ratio of 0.8, the real estate giant boasts a strong financial position, especially relative to the largest real estate outfits in China. Buy Mitsubishi Estate’s American depositary receipt (ADR) up to US$35.00.

Mitsubishi UFJ Financial Group (JP:8306) (NY:MTU)

Japan’s banks also stand to benefit from the push for inflation. Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, remains our favorite way to gain exposure to the sector.

The company boasts an extensive overseas network, including an impressive US footprint via its ownership of Union Bank and 20% equity interest in Morgan Stanley; with about US$2 billion remaining in its war chest, Mitsubishi UFJ Financial may look to expand its US footprint by buying another regional bank.

Management expects the bank’s tier 1 common equity ratio to come in above 9.5%, giving the institution ample scope to increase dividends or expand its stock buyback program. The ADR rates a buy up to US$7.50.

Mitsubishi Electric Corp. (JP:6503) (OP:MIELY)

Mitsubishi Electric manufactures and markets a wide range of electrical and electronic equipment, including generators, elevators, factory automation systems, air conditioners, and televisions; auto equipment is another important growth driver.

This diversity of product lines and end-markets enables the company to weather economic downturns with relative ease and generate steady earnings growth over the long haul.

Mitsubishi Electric boasts a solid balance sheet. The company has grown its dividend at an average annual rate of 23.6% over the past five years and has ample scope to return additional capital to investors. The ADR rates a buy up to US$26.00, but prospective investors should note that these over-the-counter shares trade thinly.

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