The JPX-Nikkei Index 400 is a great place for overseas investors to start screening for Japanese companies that are worth consideration.
The companies in the index publish results in English, as well as Japanese, and are managed to global standards.
They're also some of the most consistent, and profitable, Japanese companies.
The index is due to go through a rebalancing at the end of August. The decisions made then will depend on data from the end of June. So, investors who want to get a head start on the competition should begin calculating now who will make the cut -- and who won't.
I'll point here to six companies worth watching, or buying, based on their likely inclusion in the index come August.
On Monday, I highlighted six stocks likely to be removed from the index in August. That means they're best avoided, or shorted, between now and August.
It's worth moving early.
There's ¥4.3 trillion ($38.6 billion) in assets tracking the JPX-Nikkei Index 400, so it's quite a weight of money. The brokerage Nomura, which has crunched the numbers on the upcoming inclusions and exclusions, figures the changes will force ¥270 billion ($2.4 billion) in buying and selling of the associated stocks.
There are six companies that will see the heaviest change in their liquidity based on inclusion, gaining the equivalent of three days of trading or more, according to Nomura. They are:
- McDonald's Holdings (Japan) T:2702, which runs, yes, McDonald's (MCD) restaurants in Japan. How can you tell?! Same-store sales were up in February, marking the 39th consecutive month of gains. Happy Meals, as well as Chicken Tatsuta (fried chicken with egg yolk, soy sauce and ginger) and Chicken Tareta (similar, more tartar sauce) sandwiches have been going down well. As a result, sales were up 7.3% for calendar 2018, and operating profits advanced a whopping 32.4%. What's more, the company predicts revenue gains for this calendar year of 3.8%, with operating earnings up another 10.2%.
- Toshiba Tec (TSHTY) is a good ole-time Japanese electronics company, mainly making printers with a 21st century twist. Toshiba Tec makes self-checkout systems for grocery stores, digital signs, portable barcode printers, and a bunch of other gadgets for tracking, pricing and selling goods in a bricks-to-pixels world. But beware: Hong Kong-based activist fund Argyle Street Management is pushing parent Toshiba, which owns 50.02% of shares, to ditch non-core businesses like Toshiba Tec, which could lead to a divestiture.
- Nippon Shinyaku (NPPNY) plays to one of Japan's greatest current strengths: biopharma. It makes pharmaceuticals and "nutraceuticals," meaning its products treat (in order of sales) urinary-tract problems, blood afflictions such as leukemia and anemia, and pulmonary arterial hypertension (high blood pressure that's manifested in the lungs). There's a promising treatment for muscular dystrophy in the works. But it also makes "functional food," meaning health-food ingredients from fruit peel and fish scales, preservatives and protein powder, which generate around 13% of sales. I'd concentrate on its strong drug pipeline as the key driver of future growth.
- Japan Airport Terminal (JTTRY) stands to gain from the surge in tourist travel to Japan, particularly from China and also the emerging middle class of Southeast and South Asia. The company operates Haneda Airport, once Tokyo's domestic airport but boasting an increasing number of international flights, and retail operations in a handful of other airports. There will be the short-term boost from the 2020 Tokyo summer Olympics to come, but the operator is trying to innovate long-term, too. "Haneda House" is open as of December with a boxing gym, golf-ball range and oxygen-filled capsules to make that wait for the flight a little less dull.
- Azbil T:6845 shows another way forward for Japan's oft-troubled electronics industry. The company has taken 113 years of history importing and then making machine tools, and moved it forward, partly on the back of a 50-year partnership with Honeywell International Inc. HON that's now over. It's moved into sensors on four fronts, all areas promising strong growth: building automation, medical diagnostics, utilities meters, and health alarms and alerts.
- Acom (ACMUY) is a sarakin, a polite form for a Japanese loan shark on the foul side of the law, and a "consumer lending company" when above board. Acom is the most-legit practitioner in the industry, now an affiliate of Mitsubishi UFJ Financial Group MUFG, which owns one-third of the company. But it's the historic lack of flexibility in Japan's hidebound banking industry that has created a niche for companies making small-time loans and lending to small businesses. In return, Acom gets to charge high rates of interest that have fueled its expansion into Indonesia, Thailand and the Philippines, promising markets as the consumer economy in Southeast Asia thrives.
The JPX-Nikkei Index 400 is a qualitative and quantitative index, designed to screen for the top 400 companies that match international standards of governance and emphasize shareholder returns.
Over the last four years, the candidates for inclusion have run up through the changes, followed by a slight pop when they're announced. They normally suffer a very slight decline after the actual rebalancing, through the end of the year, meaning the smart money already moved.
The candidates for exclusion sell off steadily until the confirmed release of the rebalancing. Perversely, they then typically have a mild gain through the end of the year.
To compile the index, the provider takes a thousand of the largest stocks listed in Japan, then picks the best of the bunch by scoring for three-year average return on equity, three-year cumulative operating profit, and free float of shares.
The index provider also judges the companies on the merits of their corporate governance, particularly their conformity to global accounting and reporting standards.
New as of this August rebalancing, companies must make an English-language report on corporate governance as part of their English-language disclosures. Return on equity for new listings will also have to be better than the median return on equity of the thousand most-liquid stocks in Japan.
All of which means the 400 companies constitute the listings universe that overseas investors should consider when looking at Japan. It's worth welcoming these six to the club.