Sentiment couldn’t be worse for Japanese stocks. International investors and fund managers have been quickly dumping their holdings in the world’s third-largest economy. Worse yet for Japan stocks, the bearishness shows no sign of abating. The magnitude of the selloff has been the highest since 1987. Back then, foreign money was seeking shelter from an unsustainable bubble. Today, investors are jumping out of Japan stocks before the deflationary hole gets too deep.
You can’t blame anyone for not having faith in Japanese stocks. Japanese Prime Minister Shinzo Abe ran on a promise of a reinvigorated economy — the so-called “Abenomics.” While Abe has been a charming marketer — think “Super Mario” at the Rio Olympics — the issue of substance has been found severely lacking.
The effort has been there 24/7, as confirmed by the embarrassingly dovish Bank of Japan. Nevertheless, benchmark exchange-traded funds like the iShares MSCI Japan ETF (NYSEARCA:EWJ) have disappointed.
But could the fear in Japanese stocks be running on the excessive? I’m not suggesting to buy just for the sake of being a contrarian. Sometimes, a bad trade is really a bad trade. But I do believe that ignoring Japan stocks altogether overlooks a lot of hidden gems. Just like we do with our own S&P 500, we pick our winners and weed out the losers.
It’s true that a majority of Japan stocks have not sustained their momentum after Abe’s election. However, much of the attention has been paid to large, multinational corporations that make up funds like the EWJ. Typically, these are companies that are in highly competitive or fickle industries. On the other hand, smaller, lesser known Japanese stocks have been making significant gains in the markets.
The bottom line? Don’t throw out the baby with the bath water. Here are three Japan stocks to buy against the grain!
Japanese Stocks to Buy Against the Grain: WisdomTree Japan SmallCap (DFJ)
Click to Enlarge
For most investors, the term “small capitalization” is market euphemism for penny stocks. Unless there’s a compelling story to be traded, most big-wig fund managers will shy away.
But in the case of Japanese stocks, the roles are completely reversed. The WisdomTree Japan SmallCap Dividend Fund (NYSEARCA:DFJ), which holds unfamiliar names like Hokuriku Electric Power Co. and Hachijuni Bank Ltd., is the real star of the show.
People might initially think of the DFJ as the “poor man’s EWJ,” but that would be a big mistake. DFJ is up double-digits this year — twice as much as its large-cap brethren. Admittedly, a 10% return isn’t the most compelling story. However, over the last ten years, DFJ has outperformed blue-chip Japanese stocks on both sides of the equation.
Here’s what I mean: when Japan stocks receive a fundamental boost, we can expect to see DFJ outperform the large caps. That’s more or less an obvious statement given the fund’s riskier portfolio. But on the downside, it has actually weathered the storm better than the EWJ. In 2008, 2011 and 2014, the benchmark ETF for Japanese stocks averaged annual losses of 16%. In contrast, DFJ lost only 6%.
Simply put, small-cap Japan stocks can have their cake and eat it too!
Japanese Stocks to Buy Against the Grain: Softbank Corp. (Japan) (SFTBY)
Click to Enlarge
Japanese people are generally not known for being brash and outspoken as such behavior is considered socially unacceptable.
This is the enigma of Softbank Corp. (Japan) (OTCMKTS:SFTBY) CEO Masayoshi Son. Often called the “Bill Gates of Japan,” Son is as unique as he is bold. Born into a Korean immigrant family, he quickly established himself as a rebel with a razor-focused cause.
He is exactly what Japan needs.
SFTBY, like its eccentric CEO, is a risk-taker. Late last week, the government of Saudi Arabia and Softbank announced a partnership to “create a technology investment fund that could grow as large as $100 billion,” according to Reuters. The move is a win-win for both parties. Riyadh has an opportunity to shift its leverage towards a deflated oil market, while SFTBY can gain a significant foothold on the “Internet of Things.”
It’s no surprise, then, that Softbank is handily beating most Japan stocks. Year-to-date, SFTBY shares are up 27%. Furthermore, the company shows no sign of ending its acquisitive hunger. Softbank has its hands in everything cool and hip, from e-commerce to ride-sharing apps. SFTBY also engineered Japan’s biggest foreign business deal when it bought out British semiconductor firm Arm Holdings.
To put it bluntly, SFTBY is doing what Japanese stocks should have been doing all along.
Japanese Stocks to Buy Against the Grain: Astellas Pharma Inc (ALPMY)
Click to Enlarge
When most people think of Japan stocks, electronics and automobiles are typically at the top of the list. However, some may be surprised to learn that Japan’s pharmaceutical market is second only to the United States in size.
For quite some time, this market was isolated from foreign investment, with Japanese pharma companies focusing purely on domestic issues. But this status quo is changing, and that’s great news for companies like Astellas Pharma Inc (OTCMKTS:ALPMY).
Astellas was brought to life in April of 2005, after “Japan’s third and fifth largest pharmaceutical companies” merged. Thanks to this wealth of knowledge and expertise, ALPMY has a broad range of therapies, from cardiovascular solutions to cancer-fighting treatments. From an investment perspective, Astellas is a hidden gem. It has a remarkably strong balance sheet for a pharma company, highlighted by a lack of debt, and an above-average equity-to-asset ratio. ALPMY is also fairly priced against trailing earnings compared to the rest of the competition.
On a YTD basis, Astellas is lagging, up barely 4%. However, we have to remember that ALPMY is in arguably the most volatile investment sector. Pharma stocks will live and die by their clinical trials, and Astellas is no different. But the undeniable fact is that — with the exception of 2013 — shares have been steadily moving higher in recent years.
While it’s extremely difficult to predict anything in healthcare, ALPMY has a good chance of being a surprise hit.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
