Every year, it seems there are certain stocks or ADRs for that matter, which are favorites among investors and always overcome profit-taking to trade higher.
Move to the next calendar year however, and all bets are off.
Despite record earnings for Toyota (TM) (JP: 7203), expectations were high, perhaps too high, which has caused its shares to come under additional selling pressure. A report from the Japanese business press suggests its high buy-margin ratio is also impacting its share price and could weigh it down further.
However, a separate report says analysts, especially those with the most accurate ratings, are not expected to make any major revisions to Toyota's ratings/targets. I'm not sure this makes sense, unless they think Toyota's estimates are conservative -- note it appears a few analysts have issued reports on Toyota and from what I've gathered they have been slight adjustments up/down in target share price.
That said, generally speaking, given the difficult operating environments in both their home market and in the U.S., Japanese auto stocks have lost their luster (especially for overseas investors), at least at this point in '07.
Next, forex is a double-edged sword, as I've said in the past. Toyota, based on the underlying strength of its financials (as is the case for other Japanese exporters) is considered a buy when the yen trades at 120 against the dollar and at record lows against the euro, as it is now.
Still, forex represents a sometimes forgotten risk for American investors, because the weak yen hurts ADR prices. On the contrary, with all the talk about a potential unwinding of the yen carry trade, this would in fact help ADRs, or at least buffer some of the selling pressure ordinary shares would seemingly face in Tokyo.
As I've said in previous posts, I think the yen carry trade lives on. The spreads and liquidity are too good for the big time players (and desperate housewives, Japanese that is, seeking yield because savings deposit rates are so low) for it to end abruptly, regardless of warnings from governments.
It's unclear how much lower Toyota or other Japanese auto stocks will trade. What is clear is Toyota looks pretty attractive to Japanese investors at 13.7x forward earnings and with a yield of 1.7%, competitive against Japanese government bond yields.
Honda's (HMC) ordinary shares (JP: 7267) trade at 12.8x forward earnings with a yield of 1.66% or 1.7% if you round up.
Nissan (OTCPK:NSANY) (JP: 7201) trades at 10.5x forward earnings with the best yield of all at 2.77%. There's a reason for Nissan's lower valuation, as it has been struggling with a lack of new models and weak year-over-year sales comparisons.
In closing and to answer the question in the title of this post, it seems to me the safest and most lucrative buys are:
- (1) Toyota, based on a number of factors including its valuation, yield, recent pull-back, and broad ownership, the largest market capitalization in Japan and thus, the largest representation in domestic and overseas investment funds (ex. iShares MSCI Japan Index ETF (EWJ)) -- note its size is currently hurting it as some investors can't take the pain and are closing margin positions; positive risk/reward profile at current levels
(2) Nissan, because of its yield, seemingly cannot trade much lower. Also, as it rolls out new models and improves its sales, it should be able to beat estimates, resulting in a higher share price.
While these could be trades, it is also advantageous in my opinion, for longer-term investors to look for buy-on-dip opportunities. This year's correction has been more painful than last year's, but those that held on -- with the exception of Nissan -- were rewarded with higher share prices late into '06 (early '07).
Based on Thursday's close in Tokyo, I calculate ADR equivalent closing prices (using an exchange rate of 120.35 against the US$) as follows:
- Toyota: $117.49
Honda at $33.57
Nissan at $20.37
Disclosure: The author does not own shares of any companies mentioned in this article.