Japan Is Back — Sort of

The country is on a buying spree, but keep your money away

By Charles Sizemore, Principal of Sizemore Capital


For those who might have missed the news, a Japanese company is buying American mobile phone operator Sprint Nextel (NYSE:S).

By buying Sprint, SoftBank (PINK:SFTBF) will jump from being Japan’s third-largest mobile provider to one of the largest providers in the world.

But Sprint?

Sprint is a mess. I recommended the company last year as a deep value play, as the company was priced so cheaply as to be worth more dead than alive. But I never believed Sprint was a quality company. It was a cigar butt with a few puffs left in it. Nothing more.

What’s more, Sprint is in that unenviable position of being “stuck in the middle.” With only 16% of the U.S. market, Sprint lacks the scale of an AT&T (NYSE:T) or Verizon (NYSE:VZ), and its high debt load makes growth difficult to manage. Yet Sprint is too big and bloated to compete with smaller upstarts like MetroPCS (NYSE:PCS) that appeal to cost-conscious consumers and prepaid subscribers.

So why SoftBank’s interest?

The answer to that question is easy. They’re desperate for mobile subscribers anywhere they can get them, even at an also-ran like Sprint.

You see, Japan is dying. And I mean that literally. The Japanese population actually is shrinking — as deaths due to old age outpace new births — and aging. Roughly a quarter of the Japanese population is already over the age of 65.

How do you grow a mobile phone service when you have fewer consumers to sell to every year — and when the consumers you do have are aging and using their phones less?

The answer, of course, is that you don’t. And the same is true of virtually all Japanese companies.

Readers might think back to the 1980s, when it seemed like Japanese corporations were taking over the world. They even owned — gasp! — the Pebble Beach golf course and the Rockefeller Center. A severe stock market and real estate crash put the brakes on Japanese ambition, but demographic necessity suggests that Japanese companies will go on another binge of acquisitions, and soon.

In the 1980s, they bought trophy assets like Rockefeller Center. Today, they buy burned-out cigar butts like Sprint.

How the mighty have fallen.

They’re buying more than Sprint, however. Ernst & Young reported that Japanese purchases of foreign assets were up 81% last year.

This is a trend that I see having legs. Investing in it is a little trickier, however.

Anticipating what the Japanese will buy and getting in line before them is tricky; few investors would have seen the SoftBank deal coming unless they already had been intently studying the global telecom sector.

Japan is buying U.S. Treasuries — the country recently retook its place from China as America’s biggest creditor — but it’s hard to see much upside when the 10-year Treasury yields less than 2%.

After being chronically overpriced years into a secular bear market, Japanese blue chips are finally what I would consider cheap, or at least close to it. By the Financial Times’ estimates, Japanese shares trade for 13.3 times earnings, about on par with the U.S. Dow Industrials. But Japan’s largest companies tend to be heavily exposed to their slow-growth domestic market, making them a little less than exciting.

It’s hard to find much to like among Japanese large, liquid Japanese stocks. As I wrote recently, Sony (NYSE:SNE) has trailed Apple (NASDAQ:AAPL) as a consumer electronics company for years and seems to be a company without direction. Toyota (NYSE:TM) and Honda (NYSE:HMC) are fine auto companies with a global reach — and Honda sports an attractive dividend of 3.1% — but both are too heavily exposed to Japan’s shrinking market to be worth owning.

The story is much the same among Japan’s other large-cap titans.

For now, the best course of action for investors might be to simply avoid Japanese equities and focus instead American and European firms with a more global reach.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

Article printed from InvestorPlace Media, https://investorplace.com/2012/10/japan-is-back-sort-of/.

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