Rising Sun, Falling Market

 | Feb 05, 2014 | 2:00 PM EST  | Comments
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Stock quotes in this article:

mtu

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mfg

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nsany

While the emerging markets and China have weighed on stock markets around the world, Japan has seen its market drop off very quickly as well. The Nikkei 225 Index bounced a bit last night on decent earnings reports, but it was only a 1% bounce off four-month lows. While the Japanese economy is showing signs of a recovery, there is real concern about weakness in the emerging markets as they are key export markets for Japanese companies. The rising yen has also been a problem for the markets as traders take more of a "risk off" approach to Japan for the moment. Since the beginning of the year, the Nikkei 225 is off by more than 14% and there is now talk of a new bear market in Japanese stocks.

I don't agree, but I am the world's worst market timer so take that with a grain of salt. The employment numbers have been good, industrial production is up and auto sales just had the largest gain (27%) since 1997. There is talk of adding additional stimulus to the markets by April if the emerging markets continue to be problematic. We may see additional selling in Japan, but the strengthening economy and friendly monetary policy could lead to a turnaround before too much longer.

With that in mind, it is worth looking for bargains to pick up amid the current weakness. I have owned Japanese bank stocks for a couple of years, among them Mitsubishi UFJ Financial (MTU) has seen its stock price slide by about 10% so far this year and the stock now trades at just 70% of book value. Mizuho Financial (MFG) is down almost 7% in 2014 and it is trading at just 80% of book value. Both are seeing an increase in loan demand and will be major beneficiaries of additional fiscal stimulus. If I did not already own them, I would be a buyer on the current weakness.

Automaker Nissan (NSANY) has seen its stock price slide by 5% in the past week as the rising yen hurts its exports and emerging markets are a key part of its growth strategy. As things calm down the company should continue to see decent sales gains. I was at a Nissan dealership this week and a salesperson said that he liked working there because they do not have a single boring car in the lineup. As part of Nissan's six-year sales plan, it plans to introduce one new model every six weeks. The eventual plan calls for a total global portfolio of 66 vehicles. The stock trades right around book value and is on my "please fall a little more" list of Japanese stocks.

It would be easier to find a business Mitsubishi Corp. (MSBHY) is not in than one where it has an operating division. The finance division engages in asset management, buyout investment, leasing and financing of real estate, and more. Its energy operations include the exploration, development and production of oil and gas, and investment in natural gas liquefaction. This division also trades crude oil and other petroleum products. The metals group has operations involved in steel, iron ore, aluminum and copper. The machinery business has companies involved in everything from aerospace to farm machinery. It also has chemical operations and a Living Essentials division involved in food, clothing, paper, packaging, cement, construction materials, medical equipment and nursing care.

The company has seen its stock fall in the past week a little more than 5%. It is trading at just 60% of book value at this level. With its wide range of industry exposure, the company's stock should do very well when the Nikkei 225 begins to climb again. The stock traded at twice the current level before the financial crisis began and it is reasonable to assume it will recover most if not all of that level over the next few years if the global economy continues to struggle toward a real recovery.

I have no idea when the Japanese market will stop falling. Given my record, it is almost a certainty that the Japanese stocks I buy will go down before eventually reversing course. What I do know is that there is a lot of pessimism about Japan now and some stocks look very cheap on an asset basis.

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