07/30/2004 12:00 am EST
"Japan's boom of the 1980s created the most out-of-control, speculative bubble witnessed since the Great Crash of 1929," says Paul Tracy. "But we feel Japan has finally emerged from the 'Lost Decade', which saw the Nikkei decline 80%." Here are his top plays for a rebound.
"Back in the
1980s Japan's economy was the envy of the industrialized world and seemed to
be rapidly eclipsing the US as the globe's preeminent economic power. The average Japanese stock
traded at well over 200 times earnings by 1990. It's hardly surprising that this boom led
to a painful bust for Japan in the 1990s. Although the nation has been
through a great deal of economic turmoil since, Japan's economy
is at long last showing signs of sustainable recovery. The reform-minded
Koizumi government, elected in 2001, has been aggressively pushing policies designed to clean
up the banking system. In addition, Japanese companies have cut their debt loads
and slashed costs.
The nation's financial system is off
life support and the crushing deflation of real-estate prices appears to be coming
to an end. The best opportunities in Japan can be grouped
into two key categories: globally competitive Japanese large-caps and stocks that are nicely leveraged
to positive domestic reforms. Even better, most of our favorite Japanese
investments now trade at a discount to their foreign competitors, a far cry from
the inflated price-to-earnings ratios seen in the late 1980s.
"With a market cap north of $50 billion and total assets of over $40 billion, Mitsubishi Tokyo (MTF NYSE) is among the world's largest banks. Like most Japanese banks, the bank found itself holding a pile of bad real estate debts in early 1990. The bank finally started getting its act together in 2000, undertaking a massive reorganization. Troubled loans now account for less than 3% of the total, about half of where they stood three years ago. But the bank is far more than a glorified recovery story. The company is now leveraging its improved finances to expand into new business, such as China. With financial services still in their infancy on the Chinese mainland, there's almost unlimited growth potential in this market. Mitsubishi Tokyo's earnings recovery is now well entrenched. In the latest fiscal year ended March 2004, the company saw earnings growth top 200% as profits recovered from extremely depressed levels.
"Nomura Holdings (NMR NYSE) is the largest securities and brokerage firm in Japan. The long bear market for the Nikkei meant waning interest in the stock market for most Japanese consumers and, unfortunately, reduced commissions for Nomura. However, a swift recovery in the Nikkei since the 2003 lows is starting to drive interest in stocks again and recent surveys are showing rising confidence in the nation's recovery among the general populace. Even better, the government recently cut taxes on dividends by 50%— a move that has powered interest in high-dividend-yielding stocks. The firm’s five-year average expected earnings growth rate is 9%+ and the stock trades at 20 times estimated 2005 earnings per share.
"Millea Holdings (MLEA NASDAQ) is Japan's largest non-life insurer, a market that includes automobile, homeowner's, and business insurance. In Japan, that's a fairly mature business. However, the good news for investors is that rising premiums are now driving decent profit gains. More exciting is the company's recent expansion into new markets. In February Millea was granted a license by the Chinese government to sell property and casualty insurance in that rapidly growing market. Meanwhile, back at home the company has expanded into retirement and annuity investment products. Both of these businesses carry higher margins than the firm's traditional insurance lines. The firm’s five-year average expected earnings growth rate is 20%+, and the stock trades at 18.2 times estimated 2004 earnings per share.
"Toyota Motor (TM NYSE) is the world's fourth largest auto maker. US car makers have had to offer cheap financing and large rebates in order to sell cars in recent quarters. Meanwhile, Toyota has been able to sell its wares without such aggressive tactics. That's testament to the quality of its product lines. In addition, Toyota has also been far more inventive than its main competitors and has also remained at the cutting edge of new technologies. Toyota's Prius hybrid vehicle is so popular that the company can't make enough vehicles to satisfy demand in the US and there's already a one-year waiting list for the car. The firm’s five-year average expected earnings growth rate is 20%+ and the shares trade at 25 times estimated 2005 earnings per share.
"NEC (NIPNY NASDAQ) is one of the world's largest technology companies. The firm not only manufactures products like semiconductors and flat-panel displays, but it also offers information technology services to businesses. Clearly, both businesses have been picking up in recent quarters amid the global economic recovery. NEC was also among the first big Japanese companies to adopt shareholder-friendly practices like quarterly (rather than annual) reporting, as well as regular conference calls for investors. The firm’s five-year average expected earnings growth rate is 6%+ and the shares trade at 21 times estimated 2005 earnings per share.
"Burdened by huge debts and a less-than-inspiring product line, Nissan Motor (NSANY NASDAQ) nearly went bankrupt in 1999. However, French automaker Renault took a 37% stake in the company and installed Brazilian-born Carlos Ghosn in the CEO spot in late 1999. Ghosn managed possibly the most impressive turnaround in automobile history, aggressively cutting costs and rejuvenating the company's product line. By 2001, Nissan was back to profitability and is now enjoying its best year ever. New models like the Murano are selling particularly well in the US and the company's balance sheet is now debt free. Five-year average expected earnings growth rate is 6%+."