I decided to go fishing in the Japanese stock-market abyss. Found 4 incredibly undervalued companies

[oksana126]

The investing legend Warren Buffet once said: "Be greedy when others are fearful". Now is the time to be greedy!

The main Japanese stock index, the Nikkei 225, looks to have been relatively spared with a fall of around 11% YTD. But In reality, the downturn is much worse. As the Japanese Yen has dropped around 30% to the US Dollar during this time-frame, you can rightly assume that the Nikkei 225 has in fact fallen more than the S&P 500.

I used some tried and true value strategies to find the most undervalued Japanese companies. These filters include the Graham strategy, the Piotroski F-Score and . I found four companies that by the numbers look extremely interesting:

1. Miroku Jyoho Service (-24% YTD, P/E 7.9)
2. Nippin Concept Corp (-23% YTD, P/E 8.1)
3. Tocalo (-16% YTD, P/E 11)
4. Central Automotive Products (-18% YTD, P/E 8.9)

I collected all the numbers and a further explanation of the companies on a blog-post here.

By their financials, these companies are almost too good to be true, but they could definitely be in unfavorable industries, or some scandal I've missed might have hurt their stock price.

Have you ever heard of this companies? Would you invest in them?

 

[atpollard]

@oksana126 The problem is the world (probably incorrectly) is bearish on the entire future of the Japanese economy. Without investors rushing in to buy these stocks, all the great performance in the world won't help your equity appreciate.

 

[kalboon]

@atpollard This is kinda it. It doesn't help to find undervalued stock unless others also find them (later). A large enough company that just had a rough patch but on the books are great will probably turn up in the long run. Unknown companies with solid books tend to stay undervalued unless something happens to bring them into the spotlight.

 

[oksana126]

@kalboon You are correct. However, I do think there are two factors that increases the chance of these companies being discovered:

1. Inflation is finally picking up: This tends to correlate with higher interest rates (NOTE: BOJ is trying their best to not makes this happen). Anyhow, when interest rates are high, growth stocks tend to fall out of favor in comparison to value stocks
2. Foreign investors are showing more interest in Japanese stocks: Warren Buffet's mega-purchase of Japanese trading companies definitely kick-started this interest. But as interest rates climb, it's very likely that foreign funds see the insanely clean balance sheets of most Japanese companies and go in!

Again, we do not yet know if Japan will increase its interest rates, or if investors will continue to favor growth stocks even in a high inflation environment (even though the hammering of S&p500 indicate otherwise), but it's definitely looking brighter for Japanese value stocks atm!

 

[oksana126]

@atpollard If that is the major issue, these are still great investments. At average, they pay at least 30% of their free cash flow in dividends, and with almost zero debt, they are basically bankruptcy proof. On top of that, the Nikkei 225 has been on a bull-run in the past 5 years, so you can definitely see a reinvigorated interest in Japanese stock which will likely increase in this high interest-rate market when people see how incredibly debt free most Japanese companies are.

 

[atpollard]

@oksana126 For a dividend investment, you drive a hard bargain! For equity appreciation, I would steer in another direction for sure.

 

[oksana126]

@atpollard Very fair. The US markets always have the most explosive growth companies, if you can find them.

I brought up Japan because in these bearish times, I think Japanese stocks are a way safer bet than the US stock markets.

 

[sadmamacat]

@oksana126 Any info on the dividend growth of these companies you found?

Edit: actually able to take a look here https://in.investing.com/equities/miroku-jyoho-service-historical-data-dividends

 

[jaeb]

@oksana126 Interesting analysis.

re: Tocalo (-16% YTD, P/E 11)

The collapse of the market and cryptocurrencies means that in the short term, CPU demand (at least of the most modern CPUS) has fallen off a cliff. There's still huge demand for less complex chips (used in cars and other consumer electronics) and we do see large investments in semiconductor manufacturing all over- in China, in Taiwan, in the US, etc. Hard to know how the changes in semiconductor demand will affect Tocalo perhaps.

 

[drdax]

@oksana126 1) You did not analyze cash flow (correctly)? Nearly all of these seem to have a large amount of depreciative assets. They may not have debt, but there is still risk there.

2) Their assets per share (PBR) are lower compared to other Japanese companies in similar size/nature.

3) Their P/E may seem low to you, but comparing this to some of the trading companies, this is not that low at all. Some other companies may have a little more debt but more favorable other numbers

4) These are medium companies, so there is more risk here than some of the big names which are also bargain territory now.

Can I ask which program you are using to sift the stocks? That seems like better than what I am using right now.

 

[oksana126]

@drdax Hello Mochi-san,

Yes, you are correct that this is not an in debt analysis and so it's definitely lacking in some areas.

1. Thank you. It is true that they hold a high level of non-current assets, but their cash ratio hovers around 30-40%. But yes, higher risk nonetheless.
2. Do you mean their PBR is higher or lower than their peers?
3. I've done a big analysis on ITOCHU. You're correct that trading companies have insanely low P/Es, but often rightly so. They have such bureaucratic overhead that their subsidieris would probably do way better if they'd split up.
4. True, but in Japan, we super rarely see bankruptcies (especially compared to US mid-cap). Hence, I'd be much more comfortable in Japanese mid-small-cap even during recessions.

The tool is called börsdata developed by some Swedes that are just very into stock analysis. It's super cheap for their general offer of Nordic stocks, but you have to pay a premium to get Japanese stocks. Still, it's a bargain! What tool do you use?

 

[drdax]

@oksana126 Hi Misosouppi,

Thank you for your reply. A bit of fresh air as opposed to general reddit snarkiness.

1) The main point would be, how long can they weather a storm? Say their sales go down to 0 for 6 months, how much do they need in cash to cover their depreciation?

2) It may depend on the industry (It is an exception of course) but many of the companies I have seen in Japan swing around the 1.00 PBR mark. So if your company has 1.5 and some bad news comes out, they could drop pretty far. if they are around 0.9 or even much lower, some bad news may not change that much.

3) I do not think the fact that they could do better is a negative or relevant. It is a bit insane that these companies are priced according to Japanese standards while a huge chunk of their operations are outside of japan.

4) You are correct, but then again if stocks pay less than 3% dividend and remain undervalued/overlooked you may end up being right but still not gaining much.

I use kabutan and then just read reports from the companies themselves. I used to use kabu.com their system, but they stopped giving some of these flash search stuff so I had to change. I also google things like 0 debt companies etc.

I will check it out. I guess if I like the free version, I could give the other version a try.

I really appreciate your posts. Of course everyone has different opinions, but I enjoy them very much!

 

[dee436]

@oksana126

But In reality, the downturn is much worse. As the Japanese Yen has dropped around 30% to the US Dollar during this time-frame, you can rightly assume that the Nikkei 225 has in fact fallen more than the S&P 500.

I didn't follow the reasoning here. Is the assumption here that Japanese stocks overall (as represented by Nikkei 225) will fall when the yen strengthens? If so, I'm not sure that's a good assumption. Some Japanese businesses do well with a weak yen, some do well with a strong yen, and yet some (most?) are largely unaffected directly on a yen basis.

 

[oksana126]

@dee436 Sorry, I don't think I did a good enough job explaining my reasoning:

• First, if you compare the NIKKEI 225 to the S&P 500, it looks from the surface that the S&P has fallen much more YTD. However, if you have $1 to invest in either, you'd actually get the Nikkei 225 at almost a 40% "discount" from Jan 2022 compared to S&P's 23% "discount".
• Other currencies have strengthen less than the dollar, so the discount is lower, but overall, the JPY has depreciated compared to almost all major currencies.

I know this is less relevant if you invest with JPY, but as the Tokyo Stock Exchange is very exposed to global trading flows, the actual discount for most investors are bigger than the 11% fall in JPY we've seen on the Nikkei 225. Even in JPY you'll have a slight discount on export bound companies in the short term as their present incomes increase on their balance sheets when converted into JPY.

 

[eterna]

@oksana126 > almost too good to be true

You have a reasonable approach crunshing numbers and establishing financial filters, and but you are onto something here ... it is a red flag sentence for a reason - there are plenty of specialized and fine tuned investments programs with access to more information and expertise, so you can consider the valuation is actually likely correct at one point in time.

eMaxis slim all countries is at 15,747 right now. Go ahead and invest in your picks and we look at results in 5 years ?

https://www.investing.com/funds/slim-all-world-equity-ex-japan

 

[acc000]

@eterna What does exactly eMaxis Slim measures?
Edit: seems to be a fund

 

[eterna]

@acc000 It tracks the MSCI world index. Basically a collection of the 1500 largest companies worldwide (60% US). So when people talk about equities globally, this is quite close. Very diversified, and low fees. In line with boglehead approach.

 

[acc000]

@eterna Thanks for the info!

 

[eterna]

@acc000 My pleasure. More info here https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb

 

[acc000]

@eterna Very helpful. Japan is the second largest representative at 6%. Interesting