By Gil Morales & Dr. Chris Kacher, Managing Directors, Virtue of Selfish Investing, LLC
Over the past several weeks the Nikkei has been on the move, rallying off the lows of a multi-decade consolidation. The move has been fueled by the election of Japanese government officials who are ready to go "all in" on quantitative easing and a subsequent devaluation of the yen. The new Japanese Prime Minister Shinzo Abe and the newly parliament-approved governor of the Bank of Japan, Haruhiko Kuroda, are both known for advocating easy money policies to boost growth in the world's third-largest economy. Consequently, the yen has dropped substantially spurring demand of Japan's automobile exports. Japanese stocks have overall been in a strong uptrend since November 2012.
Since as stocks go so goes the economy, and since automobiles are a critical part of the Japanese economy, should Japan's bull market continue, companies such as Toyota Motor Corp (TM) and Honda Motor Corp (HMC) should greatly benefit. Furthermore, Toyota is once again the world's top carmaker, dethroning General Motors in 2012, and this is showing up in the company's earnings. Toyota is expected to finish out 2013 with $25.04-per-share in annual earnings, a stark comparison to the $9.12 it earned per share in 2012. 2014 estimates look for the growth to continue as analysts look for $31.00-per-share in annual earnings. This works out to a forward PE of 3.4 times 2014 earnings, so Toyota is in fact rather cheap on a straight forward P/E basis.
Honda, on the other hand, will earn $2.09-per-share in annual earnings by the time their fiscal 2013 ends, with analysts calling for $3.06-per-share in 2014, which works out to a forward P/E of 12.7. From a fundamental standpoint, both stocks are a long way from being overvalued by traditional P/E measures, with Toyota coming in as the "cheaper" of the two. On that basis alone, one would favor Toyota shares.
Chart 1 - Toyota Motor Corp. weekly chart. ©2013 StockCharts.com, used by permission.
Our methodology and approach to stock-picking, however, dictates that price/volume action, otherwise known as the "technicals," are your best predictor of where a stock is headed in the short- to intermediate-term. Looking at a weekly chart of Toyota in Chart 1, it is notable that the world's leading automaker has recently emerged from a multi-year consolidation as it treks to new 52-week highs. As well, Toyota's stair-step pattern of moving up and then consolidating prior gains in a very tight, constructive manner before moving higher again is quite bullish from our point of view, and provides investors with a reasonable reference point as we would expect the stock to hold up at or near the 10-week moving average, currently running through the 101-102 price area.
Chart 2 - Honda Motor Co. Ltd. weekly chart, 2010-present. ©2013 Stockcharts.com, used by permission.
Honda, like Toyota, has been on a strong rally since November of 2012 in sync with the Nikkei Index, but is in fact closer to exceeding its all-time high of 44.56 achieved in February 2011. Honda has also managed to break out of a one-year consolidation to make a recent 52-week high. Meanwhile Toyota is still about 30% shy of its all-time high of 133 which it hit in February of 2007. Our expectation is that the upside trend in both stocks will continue unless we were to see a breakdown in their currently bullish chart patterns, and this would mean a high-volume move below the 10-week moving averages in either stock. Otherwise, Japanese officials bent on an expanded program of easy money policies should continue to bolster the stocks, sending them higher.
Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC and Virtue of Selfish Investing, LLC, cofounders of www.selfishinvesting.com and co-authors of "Trade Like An O'Neil Disciple: How We Made 18,000% in the Stock Market" (Wiley, August, 2010) and their newest book, "In the Trading Cockpit with the O'Neil Disciples," (Wiley, December 2012). Both are former internal portfolio managers for William O'Neil + Co., Inc., where Dr. Kacher also served as a senior research analyst and co-authored an in-house proprietary book "The Model Book of Greatest Stock Market Winners", and Mr. Morales also served as Chief Market Strategist, Vice-President and Manager of the firm's Institutional Services group, and co-authored with William J. O'Neil a book on short-selling, "How to Make Money Selling Stocks Short" (Wiley, 2004).