If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
...and a Pair for the Rising Sun
02/10/2006 12:00 am EST
"After a 15-year recession, the Land of the Rising Sun has finally risen again," says Keith Fitz-Gerald. "The Japanese economy is the most stable, most liquid, and most transparent one in the region. Here, he looks at two firms poised to take advantage of "Japan’s rebirth."
"Interestingly, when I completed my research on two Japanese stocks, the Nikkei 225 was on a tear. Since, the Nikkei has just suffered its biggest decline since May 2004. Think it put a kink in my thinking? Heck no. It’s the very pullback I’ve been waiting for and only fortified my strategy to head to Japan for our portfolio. Further, as I monitored these two stocks closely during the volatile week in Asia, this dynamic duo was unfazed, just like me. The very bright long-term picture definitely overshadows this short-term pullback.
"As US interest rates rise and both American and European economies are slowing, the dollar is likely to gain against the euro. But, both the euro and the dollar are likely to lose against the yen. Why? Japan’s economy. It is looking at 2–3% GDP growth this year and in 2007. That may seem like a drop in the bucket considering China’s 10.5% growth, but it’s all relative particularly when viewed against the US and EU. Besides, Japan is a creditor nation, unlike the US, the world’s largest debtor.
"But what I find really interesting is that Japan’s leading economic indicators are finally showing obvious sustainable change as demonstrated by positive growth in Japanese real estate for the first time in 15 years. Anecdotally, I see this every day when I am home in Kyoto, Japan. Streets that were once dark and stores that were boarded up for more than a decade are once again vibrant and dynamic.
"And finally, the icing on the cake for the upward trajectory I think lay ahead for the Japanese markets is the pending reformation/privatization of the bloated $3 trillion private postal system led by charismatic Prime Minister Junichiro Koizumi. When that’s complete, we will likely see a flood of capital into the Japanese stock markets as investors seek alternatives to the dismal postal yields they’ve had in the past.
"From an operational standpoint, Japanese companies are among the best in the world in figuring out how and where to market their services. I know firsthand because I’ve worked with a bunch of them over the years. Right now, virtually every major Japanese company I am aware of is eyeballing 4.2 billion of their most immediate neighbors. On top of that, 100-year business plans are not uncommon in Japan. So, it’s safe to assume that if they’re thinking that far ahead, they will get the job done.
"The trick is identifying those companies that are likely to survive and prosper rather than be consumed by the fires of time.First, I want to introduce you to Kyocera (KYO NYSE). This Japanese company is close to my heart because it’s based in a city I love and where I spend a portion of my time each year—Kyoto. The company began in 1959 with an investment of 3 million yen and 28 employees, focusing initially on fine ceramics and eventually expanding its offerings to include everything from cell phones to solar power generation systems.
"In contrast to stodgy old-line Japanese companies, Kyocera is a relative newcomer on the block. As such, it can act freely and without the cultural repercussions that would restrict an older line company if it tried to step outside the box. This gives it some key competitive advantages, not the least of which is the ability to enter and exit business segments at will. As a result, the company currently has operations around the world
"Revenues are $9.7 billion. While the company has taken a beating in its cell phone, printer, copier divisions and exited the high-end audio markets, that’s not why I like Kyocera. What interests me most is that Kyocera has always put a ton of money into research and development with the intention of continually staying ahead of the next generation of product demand. That’s why it recently moved away from margin-starved consumer products to concentrate on its core ceramics and electronics segments, including solar energy.
"Kyocera excels at solar power generation systems and, in fact, is ranked second in the solar power generation sector worldwide—something not a lot of people know. Combined with its expertise in electronic parts manufacturing, this makes for a powerful combination. We’re looking to pick up KYO because it is taking steps to enhance its competitive position in industry segments that benefit from two major global trends we are quite familiar with—energy and communications.
"The company is also getting back to core business strengths and ridding themselves of stuff that no longer makes economic sense. I would recommend that long-term investors buy Kyocera in three stages with one-third each month. Ideally, I want you to wind up with a cost basis as close to or lower than $85 a share for a target of $100 in 24 months.
"My second choice is probably the biggest company you’ve never heard of, but that’s often the case with Japanese companies where analyst coverage is extremely limited if it exists at all. In contrast to Kyocera, which is regarded as a ‘modern’ company because it is less than 100 years old, Mitsui (MITSY NASDAQ) has its roots in a kimono shop formed in 1673, which makes it a staggering (by western standards) 333 years young.
"The company is large and has its proverbial fingers in just about everything you can imagine. Although they began with kimonos and dry goods, Mitsui turned to banking, trading, and mining operations over the centuries. Today it’s one of the world’s most diversified and comprehensive service, investment, and trading companies. Mitsui remains headquartered in Tokyo and encompasses some 723 subsidiaries with a global presence in 75 countries.
"While I like many of Mitsui’s businesses, I am particularly keen on it right now because of what they are doing as it relates to our dominant trends: energy and China. I also like the steps they are taking to ensure long-term success. First, Mitsui is not afraid to take bold decisive steps that shed unprofitable businesses and move the company toward those that will generate long-term stable income streams. In Mitsui’s case, this involves a move toward the independent power producer sector, which is essentially the privatization of power generation around the world.
"Because of the way utilities are set up and regulated, it’s actually more efficient and profitable to set up private power plants than for a public utility to build a new one. The lead times are shorter, and they can sell at market rates instead of legislated rates dictated by public utility commissions. We’re looking at $16 trillion that will be spent in the electrical sector by 2030 just to meet new global demand for power, and I love the fact that Mitsui aims to be at the heart of that trend for decades to come.
"Another reason I particularly like Mitsui for our portfolio is because it recognizes the same transition under way in China as we do. Most of the world views China as a manufacturing site and a cheap one at that. But we’re looking beyond that to a time when China begins making its own high-tech products and actually becomes the world’s largest market.To that end, Mitsui is doing huge business in China in steel, machinery, merchandise, food, and textiles. They are also saddling up to the Chinese automakers. Buy under $290 and look to a 24-month target of at least $350."
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