For decades, Japanese stocks represented the contrarian investor’s loftiest dream, and it’s worst nightmare. Since the collapse of Japan Inc in the late 1980s to early 1990s, investing in the land of the rising sun became a contradiction. With the country having one of the most powerful economies in the world, it was a perfect recovery play. But despite a mountain of policies, that recovery never materialized.
Even when current prime minister Shinzo Abe came to power due to his economic stimulus plan, the impact was short-lived.
But now, that illusive change may finally be emerging. On June 2, the Nikkei 225 index breached the 20,000 level for the first time since 2015. Year-to-date, the benchmark index is only up less than 5%. However, Japanese stocks are enjoying a steady climb since the latter-half of 2016.
Skepticism, though, is understandable. Investors have been burnt time and again with Japanese stocks. The country also faces steep challenges, particularly in demographic trends. Japan has the unenviable task of simultaneously improving gender equality in the workplace, while also encouraging a family friendly corporate culture.
Prime minister Abe, to his credit, is genuinely pushing for resolving these social issues. Furthermore, substantive signs of economic improvement are encouraging. According to Bloomberg, “Wage growth is rising with unemployment at a two-decade low, while the proportion of Japanese companies that beat analysts’ revenue estimates exceeded 50 percent for the first time since the January-March quarter of 2015. ”
Foreign investors have taken note of the efforts and results, and are jumping back into Japanese stocks. Although they are not the most reliable catalysts, their presence is certainly welcome. With U.S. equities generally becoming top-heavy, undervalued growth opportunities make a lot of sense at this juncture.
Finally, even “Reaganomics” took some time to foment, so Abenomics might be on the same road. If so, these four Japanese stocks will have big comeback potential!
Japanese Stocks to Buy: Panasonic Corporation (ADR) (PCRFY)
Seemingly out of nowhere, race car driver Takuma Sato won the 101st running of the Indianapolis 500 in thrilling fashion. PCRFY just happened to be one of the sponsors of Sato’s winning car. Not only that, the Panasonic name was the first to cross the finish line, ahead of the other sponsors.
In doing so, PCRFY will forever be associated with the first Japanese driver to win the historic Indy 500. That is what we call return on investment! But it’s also incredibly fitting for a company that has toughed it out through some lean times. However, Panasonic is a company that likes to take risks, as its endorsement deals demonstrate.
Investors doubly appreciate the effort. On a YTD basis, PCRFY is up more than 31%. Not only that, since hitting bottom in February of last year, shares are up a whopping 85%! In spite of these massive rallies, PCRFY shows no sign of letting up. Since that Indy 500 victory, Panasonic has gained more than 8% in the markets.
With other Japanese stocks finally waking up, I expect this broader tailwind to push PCRFY higher still.
Japanese Stocks to Buy: Sony Corp (ADR) (SNE)
Upon closer inspection, I discovered the reason for the anomaly — this was a party of one! But all joking aside, I think Wall Street needs to give SNE a second look.
During the Great Recession, when SNE stock dipped well into the ‘teens, I loaded up the boat. At the time, I was working for Sony, and most of my co-workers thought I was nuts. But the reason I did it, and the reason why I’m still bullish, is that the company has plenty of valuable assets. Its video game division, along with its innovations in digital optics, are second-to-none, in my opinion.
The proof is in the technicals. SNE is up 32% YTD, representative of the big surge in Japanese stocks levered towards the consumer electronics sector. Throughout the entire tenure of prime minister Abe, SNE has been the unheralded icon of Abenomics. In the trailing five years, shares have gained nearly 190%.
So yes, I’m quite a happy camper. But, believe it or not, this rally still has more legs.
Japanese Stocks to Buy: NTT Docomo Inc (ADR) (DCM)
Click to Enlarge While the Indy 500 brought a lot of joy to Panasonic and engine-supplier Honda Motor Co Ltd (ADR) (NYSE:HMC), other Japanese stocks weren’t so lucky. NTT DATA, which is a subsidiary of telecom giant Nippon Telegraph & Telephone Corp (ADR) (OTCMKTS:NTTYY), was one of driver Scott Dixon’s sponsors.
Dixon was involved in a horrific crash that he was lucky to walk away from.
Will mobile telecom company NTT Docomo Inc (ADR) (NYSE:DCM) fare better in the markets?
Although the industry is fairly choppy, DCM has weathered plenty of storms. The most prominent one was during the summer of 2015. I sold out of my position in DCM prior to the market meltdown. At the time, it was a shrewd move. Later, I came to regret going full-“doomsday prepper.” DCM has a wonderfully stable balance sheet, and strong profit margins relative to the competition. The latter is partly due to Docomo’s fiscal discipline and its willingness to cut some fat.
Since the “meltdown” that wasn’t, DCM recovered beautifully. From late September 2015 until now, shares have gained 48%. On a YTD basis, DCM is up a respectable 8%. Admittedly, these are not the sexy kind of performance figures pulled by cyclical names. However, NTT Docomo is a well-run organization that won’t let you down, provided you are patient with it.
Believe me, I regret my rash move so don’t repeat my mistake!
Japanese Stocks to Buy: Mitsui & Co Ltd (ADR) (MITSY)
These complicated behemoths invest in a wide range of commodity and energy-related projects. MITSY in particular earns almost half of its profits from the energy sector. As you can imagine, that hasn’t worked out so well in recent years.
After showing some promise throughout most of 2016, the oil markets are again choppy. However, if it can find horizontal support, that would go a long way in helping MITSY stock. After toughing out the collapse of the energy markets, Mitsui is more resilient to the present price levels.
On a more positive note, commodity prices are witnessing bullish momentum. Copper is back to levels not seen since the first half of 2015, which should boost Mitsui’s copper procurement business. Furthermore, precious metals are trending strong, which offers a tailwind to MITSY’s mining equipment division.
Of the Japanese stocks available in the American markets, MITSY is one of the more speculative. Due to its exposure to so many industries, it’s hard to forecast direction. Still, MITSY is one of Japan’s biggest companies, and it’s not going anywhere any time soon.
Should commodity and energy prices improve — and I think they will — MITSY could be a dark-horse winner.
As of this writing, Josh Enomoto was long SNE.