Two Contrarian Buys in Japan

10/02/2007 12:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of the Silk Road Investor, says investors have turned away from Japan en masse—which may be a good reason to look for good buys there.

Japan has to be the least interesting market in the world right now. Nobody I’ve spoken to is interested in investing there, based on the perception that because there are so many opportunities elsewhere, money allocated to Japan is dead money.

There are better opportunities right now than Japan, which is why Japan has been ranked quite low for some time.

On the other hand, the negative sentiment surrounding the market offers an opportunity for long-term investors to pick some undervalued stocks, if only from a contrarian point of view. And no, I don’t think you’ll be walking into a “value trap.”

Big banks, in particular, have been the dogs of the Japanese market for a while now. They’re down around 20% from their June highs and now trade at valuations close to the 2003 lows.

Recent credit woes have also added to the already negative sentiment, even though Japanese banks have little exposure to overseas subprime mortgage problems and little risk in nonperforming domestic loans. Last time I checked Japan isn’t in the midst of a financial crisis.

Mitsubishi UFJ Financial Group (NYSE: MTU) has been hit particularly hard. The main problems have been weak domestic lending demand and exposure to subprime loans.

The latter is the most dangerous development—the company has reported exposure of ¥280 billion. This exposure must be taken into account, but the fact is it represents a small amount in the banks security portfolio, and management has acknowledged the problem.

The domestic demand issues are also well known and have to do with the economy’s slow pace in turning around. Recent political changes haven’t made things better; no one knows whether new Prime Minister Yasuo Fukuda will try to push forward the structural economic changes the economy needs.

But the growth rate of the Japanese economy continues to improve and will do even better if the rest of the world avoids recession and recovers next year. Buy Mitsubishi UFJ Financial Group. (The stock closed above $9.00 Monday—Editor.)

Mitsubishi Heavy Industries (OTC: MHVYF) is a diversified manufacturing and construction company [with] operations in a bevy of fast-growing businesses, including conventional and nuclear power.

Japan relies on nuclear power for its electricity needs, and Mitsubishi Heavy is one of the nation’s leading builders. It also builds plants beyond its borders, including in China.

Even more compelling, given Japan’s increasing national defense needs, is Mitsubishi Heavy’s aerospace and defense business. Changes in Japan’s arms export laws also allow Mitsubishi Heavy to export missile nose cones and command and control systems to countries like the US.

Mitsubishi Heavy’s nuclear power plant business is the fastest growing non-military segment and I expect this growth to continue. Management has been trying to lower costs; success on that front will help tremendously. Buy Mitsubishi Heavy Industries. (It closed Monday above $6.00—Editor.)

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