Japan: Four Plays on a Rising Sun

09/18/2014 10:00 am EST


George Putnam

Editor, The Turnaround Letter

Japan’s government has certainly tried just about everything in recent years to get their economy going again. In the meantime, Japanese stocks have gone almost nowhere but down observes George Putnam, editor of The Turnaround Letter.

The Nikkei index is at about the same level as it was in 1986 and it is down more than 60% from its all time high set at the end of 1989.

Investors began to get excited about Japanese stocks early in 2013 in response to new government policies, but then their ardor cooled later in the year, and many Japanese stocks gave back their gains.

We don’t know exactly when the Japanese government will finally get things right.  And we acknowledge that the country has some serious structural problems, such as an aging population.

But we also know that Japan has some well managed companies that are major—and sometimes dominant—players in their global markets.

For that reason, we think it makes sense to consider a few Japanese stocks for your portfolio.  The companies below are all large businesses with strong franchises in a variety of different industries.

Canon (CAJ) is best known for its copiers and cameras, but it also makes a variety of other imaging and printing products.

The company is in the midst of a five-year program to build an overwhelming leadership position in each of its primary businesses as well as to develop innovative new technologies. Canon’s long-term outlook is intriguing.

Honda Motor (HMC) is one of the largest worldwide manufacturers of cars and the largest maker of motorcycles; it also makes power products and provides financial services.

A selloff in the shares following the 2011 tsunami proved a buying opportunity, but the shares have softened again to a level where they look very attractive.  The multi-year global demand picture for autos looks encouraging with new buyers in emerging markets and aging auto fleets in the developed countries.

Mitsubishi UFJ Financial (MTU) is one of the world’s largest financial institutions.  During the financial crisis it was able to provide a $9 billion capital infusion to Morgan Stanley that has evolved into a 22% ownership position.

A major initiative to double the volume of its credit card business (Japanese consumers have historically been reluctant to use credit) by 2020 is but one of the company’s growth opportunities.

Nomura Holdings (NMR), Japan’s largest investment bank and brokerage businesses, has significant worldwide operations. Like many global investment banks, Nomura was caught up in the subprime lending debacle, but it has been slower to rebound than many of its competitors.

However, we are beginning to see signs of improvement, including upgrades by leading credit rating agencies.  Nomura could benefit from growth in developing Asian economies.

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