Thursday, April 2, 2009 0 comments ++[ CLICK TO COMMENT ]++

Japan cheaper than cheap

It's no doubt a horror show for anyone that invested in the Japan in the last, oh, 30-some years. Well, repeating a point I and others have made numerous times, Japanese stocks appear cheap. I said they were cheap an year ago so what should we call them now? Back then, a majority of the stocks on the Tokyo Stock Exchange were trading below book value. Now, it seems that the whole market is trading below book value*.

Financial Post, Canada's WSJ, has some details on an analyst report:

Japanese equities are the cheapest in almost 30 years on earnings and asset based measures. In fact, the entire market is trading below book value according to Montier. That goes doubly so for small capitalization stocks in Japan where the entire market is trading “well below” book value.

“Ben Graham would be having a field day in Japan,” writes Montier in his latest report in reference to the famous value investor who counseled investors to own net-nets, stocks trading cheaply relative to current assets less total liabilities for capital protection and return. Japan has more than half of all the net-nets globally, says Montier.

There are almost 50 large capitalization companies and roughly 250 small capitalization companies listed in this report that qualify as net-nets in Japan according to Montier. The Nikkei index is down more than 50% since last July and down 78% from its December 1989 high.



Japan has been the classic value trap--not just a few stocks or sectors but the whole market! The question is whether valuations can drop further (this matters a great deal because these companies may not return anything to shareholders other than dividends). Compared to an year or so ago, it seems there are actually net-nets of large companies. Fifty large-cap net-nets would definitely be a rare scenario.

For those new to this blog, let outline my view of Japan. The Japanese stock market is very similar to USA in the 1930's to 1940's period. Similar to how no one wanted to own American stocks after the Roaring 20's bust, Japanese stocks went out of favour after the humongous stock market and real estate bubble in the late 80's. My opinion, however, is that Japan has never been capitalistic like America and hence their businesses were never as profitable for shareholders as American ones (this was true even in the 70's and 80's when Japan Inc. was taking over the world.)

If you are a classic value investor in the Benjamin Graham mold, there are very few markets better than Japan. However, companies are not shareholder-friendly and language is a barrier (at least for the small-caps and mid-caps.) Blindly buying a basket, a la John Templeton, is also a strategy worth considering.

I was doing quite a bit of research on Japan and Japanese stocks an year ago but gave it up due to several reasons. First of all, the macro trends, particularly related to demographics and massive government debt, are not favourable. Secondly, other markets, particularly USA, sold off sharply so it wasn't worth the trouble of looking elsewhere. Lastly, and most importantly, I lost faith in Japanese businesses and came to the conclusion that they will never be shareholder-friendly. For example, many companies were sitting on huge piles of cash but my feeling was that it was next to impossible to get them to do anything with that cash (other than earning 0.5% on it, of course.)

After reading the blurb I quoted above, I may start looking at Japan again. What interests me now is the fact that some stocks are net-nets. I'm going to look and see if it is worth investing in one or more of the 50 large-cap net-nets that James Montier mentions. I don't have access to the report but I'll see if I can find those 50. I'm limiting myself to large-caps because they may be "safer", easily known through their brands, and often have English documents. Large companies are also sometimes more responsive to shareholder desires.

(* It's not clear to me if this means that every single stock is trading below book value, or simply that the market as a whole is below book value.)

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