Is Japan really cheap? Not quite... but there is huge divergence in specific stocks

(This post was written yesterday (Tuesday in Canada) and given the huge moves in the Japanese stocks in the last few days, some of the numbers may have changed quite a bit. Japan rallied strongly yesterday but I suspect it will sell off today given how the US markets were off today.)

If you're feeling brave, how do you fancy investing in the Japanese stock market right now?

The Tokyo Stock Exchange plunged more than 10 percent overnight. It has now fallen by a fifth in the three trading days since the earthquake first hit. This is the scariest stock market on Earth. It's one of the fastest market collapses in history, comparable to 1929 and 1987.

But Japan is still the world's third biggest economy - and a much better one than many imagine. (More on that below). So is this the time for the brave to start buying?
— Brett Arends
Writing for The Wall Street Journal, Brett Arends wonders if Japan is attractive—at least for those that can tolerate the risk.

The Nikkei has seen one of the biggest declines in history yet I feel the market isn't exactly cheap. The following weekly chart from shows the current state of affairs:

The decline is big, no doubt; but it's just a bit below what it was in mid-2010 and late-2009. Attractive? Perhaps. But not extremely cheap by any means.

The EWJ ETF—this is in US$ I believe whereas the Nikkei is in Yen—which tracks a slightly different index, the MSCI Japan index, hasn't fallen as much. Do note that the US markets had a big recovery off the bottom today so that explains part of the rally in US-listed securities and indexes.

On this chart, the index is just back to what it was in late 2010. Nothing to write home about, really.

Lastly, given some big movements in currencies, it is important to watch the Yen as well. As is usually the case during crises, the Yen and the US$ tend to strengthen. The following chart is the Yen index:
The Yen has strengthened quite a bit and is near a multi-year high. The strengthening Yen will hurt the export-oriented Japanese industry but depending on the impact on the corporation you are investing in, it may actually boost your returns.

Although the Tokyo Stock Exchange has been selling off, the big losses are mostly in insurers, nuclear electric companies, and others directly impacted by the earthquake/tsunami/nuclear damage (on a side note, reinsurers in America and Europe, including one of the ones I hold, Montpelier Re, is getting killed and will likely post huge losses). Blue chips with foreign earnings such as Toyota, Honda, Sony, and the like, haven't sold off much. However, local companies such as Fast Retailing (TSE: 9983), owner of Uniqlo clothing brand, Sapporo, and so forth, seem to have sold off sharply.

The following graphic from WSJ's Market Data Center section lists the biggest decliners yesterday. I have highlighted some blue chips others may be familiar with, or stocks I have covered on this blog in the past. Highlighted in light-red is Tokyo Electric Power, which is the owner of the nuclear plants that are close to meltdown.

I realize the graphics are very tall but I wanted to list all the stocks for historical reference purposes. If you want to play around with the data, click the WSJ link in the prior paragraph and copy the data to a spreadsheet. Click on the image for a much larger image.

The second table below, shows the decline from the stock's 52 week high.

Sorry about the long list but I need it for future reference.

I'm looking through the list and starting my research. If I find anything worth investing in, I'll post about it later. I think it's probably worth paying more attention to the 52 wk decline than the daily decline. Although some of the 52 week decline was due to company-specific events that occurred before the earthquake/tsuanmi/potential-nuclear-meltdown (e.g. Toyota Motor), I think it gives a better sense of how cheap something is. The daily decline can be misleading.

Quick glance shows that the multinationals with moats haven't been sold off much. For instance, Toyota, Honda, Fanuc, and Yaskawa Electric declined 10% or less on Tuesday. I'm not entirely sure but I think the prices are in local currency terms (Yen) and given how the Yen has rallied around 5%, these blue chips likely declined less than 5% for the day.

The most interesting opportunities appear to lie with companies that cater to the local market, such as Sapporo Holdings. I don't know what Tokyo Broadcast and Japan Radio are but if they are what they sound like, I find it interesting they fell more than 35% yesterday. Unless they are located in the earthquake-hit area or have most of their assets there, it would seem bizarre for media companies to be sold off heavily.

Do keep in mind that companies in the affected areas will suffer big permanent capital impairments (especially if assets aren't insured and/or employees are affected). So there is a reason the market is severely marking down some of these companies.

As has been the case for the last 15 or so years, Japanese small-caps are the most attractive. However, many don't publish English information and are hard for foreigners to understand.

Having said all that, I'll repeat what I have said numerous times before. Japanese companies are not well run; they have low ROEs; they are over-capitalized yet shareholder activism is almost non-existent; M&A is strongly resisted; and the Japanese landscape is littered with corpses of many value investors and contrarians who thought Japan was cheap in 1998... in 2006. Will 2011 be different? Is this the buy, not just off a panic sell-off, but at the bottom of a super-long bear market?

Side Note:

Non-Japanese insurers and uranium miners have also been sold off sharply of late. Contrarians can bet on a recovery of the nuclear industry by betting on uranium miners such as Cameco, Uranium One, and so on. This involves more of a macro call and given how uranium—almost every commodity except a few like natural gas—were quite popular going into this crisis, it isn't as contrarian as it seems.


  1. Hi Sivaram,

    Thank you for your post. Love it.

    Just thought I share an idea with you regarding the excel table. I use either google doc, SCRIBD or Doctoc to solve that problem. I use Docstoc predominantly now as it works like an external HDD and I can share it (Word, PDF, excel table etc) without worrying about formatting too much.

    Here's an example

    Enjoy and keep it up.

  2. Sivaram VelauthapillaiMarch 20, 2011 at 10:19 PM

    Thanks for the suggestion. I tried using Google Docs in the past but it had problems importing Excel docs so I sort of gave up on it. But that was many years ago and things may be better. I'll consider your suggestions.

    By the way, you have a very good blog. It's my first time seeing it and I'm impressed. Detailed and insightful. Good job and keep it up.

  3. Sivaram VelauthapillaiMarch 20, 2011 at 10:22 PM

    <span>Thanks for the suggestion. I tried using Google Docs in the past but it had problems importing Excel docs so I sort of gave up on it. But that was many years ago and things may be better. I'll consider your suggestions.  
    By the way, you have a very good blog. It's my first time seeing it and it's pretty good. It's hard to tell what is your original content and what is from other sources but it's detailed and current. Good job and keep it up.</span>


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