Long-term Options for the Rising Sun

If we had access to a time machine and returned to Japan a month after the end of World War II, I suspect we would be sickened by the horrific devastation before our eyes. But the war-torn nation soon returned to the world stage, hosting the 1964 Olympics, transcending language barriers with movies like the Seven Samurai, and transforming the business landscape with firms that included Sony (NYSE: SNE), Toyota (NYSE: TM), Honda (NYSE: HMC) and others.

It’s this kind of resilience in the face of adversity that I suspect will bring Japan’s economy back after the damage sustained this year from a tragic cocktail of earthquake/tsunami/nuclear meltdown.

But Japan will recover and that could translate into big profits for the patient options player. My outlook is not for next month or this summer, but for further out, to give companies some time to adapt to tougher circumstances, rebuild, and get back to speed.

Here are six Japanese options for the nation’s eventual recovery.

 

iShares MSCI Japan Index — (NYSE: EWJ)

One of the best ways to play the eventual Japanese recovery is to buy call options pegged to the iShares MSCI Japan Index (NYSE: EWJ). This exchange-traded fund (ETF) contains the biggest corporate names traded on the Nikkei exchange. Top 10 holdings in the fund include Japanese-listed stocks Toyota, Honda, Mitsubishi Financial, Canon, Sumitomo Mitsui Financial, Mitsubishi Corp., Takeda Pharmaceutical, Mizuho Financial Group, Softbank and Sony Corp. If, as I do, you suspect that these stocks will be appreciably higher by early next year, a good way to play it is with the long term option like the EWJ Jan 2012 11 Call.

 

Hitachi — (NYSE: HIT)

Tokyo-based diversified electronic products maker Hitachi (NYSE: HIT) is a Japanese conglomerate whose shares were hit hard after the devastation that struck in March. Up until then, however, the stock was on a tear. HIT shares surged from a July, 2010 52-week low of just under $36, to a pre-earthquake high of nearly $65. Since the disaster selloff began, shares have fallen below the $48 mark. But when a return to normalcy takes place in the Japanese market — and in American Depository Receipts (ADRs) that trade on the U.S. exchange — then you’ll want to own a long-term call on HIT shares. Your best bet on this front is the HIT Oct 2011 50 Call.

Toyota Motor — (NYSE: TM)

The Japanese automaker’s shares crumbled in the aftermath of the disaster, falling from a 52-week high of nearly $94 in February to the current price of $76.25 (as of April 18). The company’s parts supply line and Japan-based operations have been handicapped by the economic devastation brought on by the combined natural disasters. But just last week Toyota Motor (NYSE: TM) said it would restart and operate its 17 plants in Japan at about half their normal run rate through June 3. It plans to reevaluate Japanese production schedules after that date. If there is any company that can bounce back real fast, it will be this auto powerhouse. Take advantage of Toyota’s resilience with the long-term TM Jan 2012 80 Call.

Honda Motor Corp. — (NYSE: HMC)

Like its main rival, Toyota, Honda Motor Corp. (NYSE: HMC) recently resumed domestic production. Honda’s factory in Sayama, just outside of Tokyo, was not damaged in the disasters. However, because many of the 20,000 to 30,000 parts that go into its cars do come from the northern areas that were stricken by the earthquake, many of Honda and Toyota’s suppliers were knocked off line. It’s definitely going to take awhile for those parts makers to return to full strength. But Honda and Toyota are tough, resourceful competitors and they will find a way around their current obstacles. That will likely boost shares in the months ahead. Try the HMC Oct 2011 40 Call for longer-term exposure to the automaker’s turnaround.

Sony — (NYSE: SNE)

Electronics giant Sony Corp. (NYSE: SNE) had been on the mend beginning in the latter half of 2010 and well into the first quarter of 2011. The stock surged nearly 40% during that time period — then the earthquake hit and the selling began. SNE shares plunged about 20% since their 2011 peak, and that’s pushed down the value of calls on the stock. If you believe in the Japan recovery thesis, then give Sony some time with the SNE Jan 2012 30 Call.

Market Vectors Nuclear Energy ETF

One industry that definitely took it on the chin as a result of the Japan disaster was uranium mining and nuclear stocks. The sector was riding very high in the months leading up to the earthquake, but the events at the Fukishima nuclear power plant put the emergency brake on stocks in the space. Yet we’re already starting to see a return to normalcy in the space, and if this trend continues toward the latter part of the year, we’re likely to see a nice gain in the Market Vectors Uranium + Nuclear Energy ETF (NYSE: NLR). You can take advantage of a potential resurgence in the sector with the NLR Nov 2011 23 Call.

At the time of publication, Jim Woods held no positions in any of the stocks, funds or options mentioned in this article.