Take the Long View of Japan

 | Jun 06, 2013 | 3:00 PM EDT
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There is a class of investors and traders that I call the headliners. These folks get overly excited about headlines coming out of the financial press and don't bother to dig deep enough to get a real picture of what's actually happening.

Last night as I suffered through an ugly Orioles loss to the Astros, I got emails from a couple of my headliner friends. The general tone was that given all that has happened recently in Japan, it must be time to buy this horrible crash. I have done fairly well in Japan over the years with some cheap stock selections that did very well, so naturally these friends expected me to have some great ideas to take advantage of this dreadful market move.

Let's look at what has happened in Japan, according to the headlines. Japan's stock market is flirting with bear market territory: The Nikkei is now down 19.1% from the highs it hit on May 23. The Topix is down 17% over the same period. The carnage has been pretty impressive, as total market capitalization has dropped a more than $500 billion in a little over two weeks. That's painful no matter how you slice it.

It seems that investors are not thrilled with Prime Minister Shinzo Abe's proposal to get the economy jump-started in Japan. The aggressive quantitative easing and stimulus spending caused Japanese market to rally impressively earlier this year, but market participants seem to want more from Abenomics, and they want it faster. The ongoing push to get Japan's economy moving has created enormous turmoil in the currency and equity markets, and it's likely to continue for much of the summer. The questions in the mind of the headliners are, have we reached the point of maximum pessimism, and is it time to go all-in and buy the crash in Japan?

Let's look at what is going on in Japan form an investor's perspective. I came into this mess long some Japanese stocks that I purchased at steep discounts to book value. For example, I bought Sony (SNE) and Panasonic (PCRFY) at the end of 2012, as both were cheap on an asset basis. They have gotten hit a little in the past few weeks -- Sony is down almost 18% from the highs, and Panasonic down by a little more than 17%. If you step back and look at a longer time frame, Sony is up almost 70%, and Panasonic is up more than 40%. The same holds true for Japanese bank positions: Mitsubishi UFJ and Mizhou Financial (MFG) are down in the short term but up substantially in the past year.

I show 47 stocks that are based in Japan and traded here in the United States. Eleven of them are down so far this year. Eleven of them trade for less than tangible book value. Five trade for single-digit price-to-earnings ratios. Sixteen trade for less than 7x cash flow. Thirteen of the stocks trade at less than 5x EBITDA. The Japanese market has been brutal for the past few weeks, but it has not created the types of bargain issues associated with a real crash. All that has happened is that the Japanese market has retraced a small portion of its very large gains over the past year.

When I look at Japan right now, I do not see any compelling bargains that I do not already own. In a real full-on Japanese market crash, I would expect to be able to buy companies such as Honda Motor (HMC) and Toyota Motor (TM) below tangible book with single-digit P/E ratios. They are not trading anywhere close to those levels. The large banks are trading below tangible book but are not even close to the 50% of tangible levels we saw a few years ago.

Japanese markets are down in the short term, and they are highly volatile, but they are not especially cheap at this level. Bottom-fishers at this level are making a bet that Abenomics will eventually work, and they may well be right in the long run. They are not picking up any great bargain issues caused by a crash. The market is nowhere close to a point of maximum pessimism.

Headliners see whatever surface is provided by the financial media. Most market-related issues are far more complex than can be contained in a headline or sound bite. You have to dig deeper to get the real picture.

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