Japan, Inc. on Sale - At Double-Discounts

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 |  Includes: JEQ, JOF
by: Joseph L. Shaefer

There is no guarantee that frightened investors won’t continue to sell off Japanese companies. That's one reason not to buy Japanese firms right now. And there are two additional reasons.

First, their extraordinary expenses are unknown at this point. One company may have had insurance from various carriers that will cover 80% of their losses from lost revenue and the costs of rebuilding. Another may be 100% self-insured and will take a larger hit to their earnings.

Second, we don’t know what revenue they will lose to competitors in other nations who will now benefit from this calamity by rushing to replace Japanese suppliers in the global markets. Already we see a number of other nations’ semiconductor companies moving up as the Japanese semiconductor industry has been particularly hard hit by the earthquake, the tsunami and the environmental hazards that make customers question the quality of the product they can produce in the short term.

So – we have a potential triple whammy: investor caution, which may keep the stock prices of Japanese companies down no matter what the actual companies do; lost revenue and great expense to rebuild what has been destroyed; and the displacement effect that comes when a supplier is seen as a possibly less secure source of product.

On the other hand… Japan will rebuild. From the rubble of WWII, the country rebuilt. From previous natural calamities, Japan rebuilt. Even from the devastating Kobe earthquake of 1995, the country rebuilt. As it does, its factories will be newer, processes more technologically advanced, and even its nuclear reactors – assuming common sense and public opinion agree – will be of the newer designs that, for instance, use gravity to bring water down over the fuel rods rather than the obviously troublesome current system of using ground-level pumps to push water up.

Those who take the long view, and who understand that any of the three factors above could bring share prices below that which they pay today, are also those who may benefit from purchasing Japan, Inc. at a discount. Shares are down. But there is a greater discount at play here, as well. Two closed-end mutual funds that buy Japanese companies are selling at discounts of 9% and 4%, as well. If you were to buy these closed-ends, you would be receiving a slightly larger dividend flow than you would by buying the companies directly. You’d also be buying a dollar worth of assets for 91 cents or 96 cents.

The first of these is the Japan Equity Fund (NYSE:JEQ). Its Top 10 holdings are:

Mitsubishi UFJ Financial Group (NYSE:MTU)

Toyota Motor Corporation ADR (NYSE:TM)

Honda Motor Company ADR (NYSE:HMC)

Mitsubishi (OTCPK:MSBHY)

Mitsui Fudosan Co. (OTC:MTSFF)

Nippon Telegraph and Telephone (NYSE:NTT)

Tokio Marine Holdings (OTCPK:TKOMY)

East Japan Railway Co. (OTCPK:EJPRY)

Asahi Glass (OTCPK:ASGLY)

Sumitomo Electric Industries (SMTOY.PK), and

JX Holdings (OTCPK:JXHLY)

Tokio Marine and East Japan Railway may be hit harder than many others but my guess is that they have lain off much of the risk, the former via a consortium of reinsurers, the latter with insurance. What strikes me about all 10 of these companies, and the others in JEQ’s portfolio, is that they have been hit hard – but they also form the backbone of precisely the kind of companies that will provide the capital, the expertise, the tools, the materials and the heavy machinery to rebuild a shattered nation. Short term, they are being savaged. But is short term this week? This month? My belief is that the Japanese people will roll up their sleeves and get to work, just as they did in Chile when their horrible earthquake struck, and in New Zealand when their most recent quake almost leveled the beautiful town of Christchurch.

The second possibility is the Japan Smaller Capitalization Fund (NYSE:JOF). As the name implies, these are smaller cap firms that are typically market leaders in certain niches. The Top 10 Holdings are not exactly household names in the US: Otsuka Corporation, Itochu Corporation (ITOCY.PK), Hitachi Chemical, Park24 Co., Yaskawa Electric Corp. (YASKF.PK), ABC-Mart, Inc., Nihon Kohden Sekisui Chemical Co., Don Quijote Co Ltd (DQJCY.PK), and Misumi Group.

Because they are not well-known names here, allow me to provide the top categories of the sectors in which they operate, directly from the website of the fund sponsor, Nomura Asset Management:

Industry Diversification

% of
Net Assets


Services

13.0

Miscellaneous Manufacturing

10.4

Information and Software

10.2

Chemicals and Pharmaceuticals

9.9

Electronics

9.4

Retail

8.6

Automotive Equipment and Parts

6.4

Banks and Finance

6.1

Machinery and Machine Tools

5.1

Real Estate and Warehouse

5.0

Click to enlarge
Click to enlarge

I hasten to add that the idea of purchasing Japanese companies now is replete with possible risk. Please see the “triple whammy” comments above! But where there is risk, there may also be opportunity for the bold. It seems to me there will be an awful lot of automobiles replaced in the coming weeks and months, a lot of steel buildings re-built, essential services restored, electronics at both the consumer and business level replaced, chemicals needed for cleanup and sanitization, and loans from banks to finance it all. Take another look at the list immediately above.

If your due diligence leads you to the same conclusions I have reached, that the Japanese people will rebuild and that they will “Buy Japanese” as they do so, then these and other quality closed-end funds may be a great tool to allow you to invest alongside them.

Disclosure: We have recently begun to purchase JEQ and JOF. We are buying more today and will continue to do so if/as they decline to even more attractive prices.

Additional Disclosure: I am long JEQ, JOF.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.