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.
Recovery Stock #3 – Toshiba (TOSBF)
Toshiba Corp. (OTC: TOSBF) is even more of a nuclear stock than Hitachi. The company took over the old Westinghouse nuclear unit and is a major power in the world nuclear field, in addition to being a high-technology conglomerate. Both Hitachi and Toshiba are involved in trying to resolve the situation as both have supplied equipment for the nuclear plant.
While I can see how investors would want to stay away from nuclear stocks, you have to keep in mind that Japan has no fossil fuel deposits, so nuclear power remains the most viable option for the country. I think that both Hitachi and Toshiba will learn from the mistakes in Fukushima and build better plants in the future; no one could have predicted such a strong earthquake. And it was not the reactors themselves that started this, but the supporting cooling equipment that failed.
Recovery Stock #4 – Makita (MKTAY)
Makita Corp. (NASDAQ: MKTAY) makes power tools for professional users worldwide. Approximately 83% of Makita’s sales are outside of Japan, so the hit to the company’s operations will be small. But the remaining 17% should see a nice boost in the year ahead. Rotary hammers, hammer drills, demolition hammers and grinders are just what Japan needs at present.
This is a relatively small company with a market cap of just under $6 billion, so any reconstruction boom should be easily felt on the bottom line. Before the disaster, revenues were already growing at 12% a year, while earnings grew 27% over the past year. The shares were under pressure, along with the Japanese stock market, even though the company’s sales are relatively safe, and in the next year, the boost should be notable.
Recovery Stock #5 – Mitsui (MITSY)
Mitsui & Co., Ltd. (NASDAQ: MITSY) is an old Japanese trading house. The company procures goods and services for other industrial customers in Japan and around the world, and is categorized under “distribution services,” even though there isn’t a U.S. equivalent to its type of business.
The company has eight distinct business groups: iron and steel products, mineral and metal resources, machinery and infrastructure projects, chemicals, energy, foods and retail, consumer services and IT, and logistics and financial markets.
Given how it is closely intertwined in the Japanese business world, I expect it to benefit tremendously from the reconstruction effort. The shares trade at only seven times earnings because its margins are thin based on its distributor model, but that should not discourage you from considering this recovery stock.