The headlines about Japan are going from bad to worse, and the first reaction for many investors is to sell and stay away. And while I am not sure how long the situation will go on, even in a worst-case scenario, the bottom line to this tragedy is that Japan will rebuild, as it has done time and time again:
- In September 1923, Japan rebuilt after the 7.9-magnitude Great Kanto Earthquake devastated Tokyo, the port city of Yokohama, and surrounding cities in the Kanto region.
- In August 1945, at the end of World War II, Japan rebuilt after Hiroshima and Nagasaki were flattened by two atomic bombs.
- In January 1995, the country rebuilt after the 6.8-magnitude Kobe Earthquake destroyed ports, wharf facilities, expressways and buildings at a cost of more than 10 trillion yen (or 2.5% of Japan’s GDP at the time).
Japan is committed to spending money hand over fist to rebuild its nation after the recent disaster. The current estimate for the rebuilding and recovery of northern Japan’s disaster-stricken area is at least 14.5 trillion yen.
I recently identified the No. 1 company that will be at the forefront of this dramatic reconstruction effort for my Asia Edge service, but I have been inundated with requests to come up with more stock picks that will be reconstruction beneficiaries. Here are five recovery stocks for further investigation:
Recovery Stock #1 – Kubota (KUB)
Kubota Corp. (NYSE: KUB) is a manufacturer of farm equipment, engines and construction machinery. The company also makes ductile iron pipes and environment-related products, such as environmental control plants, as well as all kinds of industrial casings and air conditioning equipment. The construction and farm equipment segment is by far the largest, and overseas revenues of this segment accounted for 62.8% of the total revenues in the latest fiscal year. Kubota makes mainly light-duty construction equipment, which should be in heavy demand in Japan as losses from the tsunami climb.
The shares are modestly priced at 15 times forward earnings, but I can see how both sales and earnings will receive a boost in the next year, despite any declines in the share price surrounding the uncertainly about the problematic nuclear plants.
Recovery Stock #2 – Hitachi (HIT)
Hitachi Ltd. (NYSE: HIT) is probably one of the most diversified Japanese investments. The company is a pioneer in electricity generation systems, but it also makes many consumer products and electronic devices. It is a partner with General Electric (NYSE: GE) in many nuclear projects, which was one reason why the shares were under pressure on the reactor news. However, I don’t think nuclear power is going anywhere, considering that many emerging markets have few other choices for obtaining low-cost electricity.
Hitachi also makes heavy-duty construction equipment, elevators, escalators and railway vehicles and systems, and many other high-tech devices. As a major industrial firm, I am sure it will get its fair share of the reconstruction effort business. One potential outcome of this disaster is that Japan builds more reactors in safer locations with better cooling systems. The shares trade at nine times forward earnings, and despite the short-term operational disruption, I am looking for a pickup in profitability toward the end of the year in this recovery stock.