Contrarian Buys
FALLS CHURCH, Va–Japan has to be the least interesting market in the world right now. Nobody I’ve spoken to is interested in investing there, based on the perception that because there are so many opportunities elsewhere, money allocated to Japan is dead money.
There are better opportunities right now than Japan, which is why Japan has been ranked quite low in the Fresh Money Buys list for some time.
On the other hand, the negative sentiment surrounding the market offers an opportunity for long-term investors to pick some undervalued stocks, if only from a contrarian point of view. And no, I don’t think you’ll be walking into a “value trap.”
Big banks, in particular, have been the dogs of the Japanese market for a while now. They’re down around 20 percent from their June highs and now trade at valuations close to the 2003 lows.
Recent credit woes have also added to the already negative sentiment, even though Japanese banks have little exposure to overseas subprime mortgage problems and little risk in nonperforming domestic loans. Last time I checked Japan isn’t in the midst of a financial crisis.
Long-Term Holding Mitsubishi UFJ Financial Group (NYSE: MTU) has been hit particularly hard.
The main problems have been weak domestic lending demand and exposure to subprime loans. The latter is the most dangerous development–the company has reported exposure of ¥280 billion. This exposure must be taken into account, but the fact is it represents a small amount in the banks security portfolio, and management has acknowledged the problem.
The domestic demand issues are also well known and have to do with the economy’s slow pace in turning around. Recent political changes haven’t made things better; no one knows whether new Prime Minister, Yasuo Fukuda, will try to push forward the structural economic changes the economy needs.
But the growth rate of the Japanese economy continues to improve and will do even better if the rest of the world avoids recession and recovers next year. Buy Mitsubishi UFJ Financial Group.
Sumitomo Mitsui Financial Group (OTC: SMFJY) is Silk’s Alternative Holding recommendation for Japanese banks. Although Sumitomo Mitsui is a big bank, its overseas assets account for a little more than 13 percent of its total assets, the lowest percentage among Japanese megabanks.
It’s also shifted its strategy and now pays great attention to small-scale financing and commercial banking. A successful implementation of the strategy will give Sumitomo Mitsui great leverage in the eventual reemergence of the Japanese consumer. Buy Sumitomo Mitsui Financial Group.
Mitsubishi Heavy Industries (OTC: MHVYF) is the Portfolio’s non-bank recommendation. A diversified manufacturing and construction company, Mitsubishi Heavy has operations in a bevy of fast-growing businesses, including conventional and nuclear power.
Japan relies on nuclear power for its electricity needs, and Mitsubishi Heavy is one of the nation’s leading builders. It also builds plants beyond its borders, including in China.
The company has 24 manufacturing/sales facilities in China; though those operations currently represent only about 4 percent of total orders, the numbers trending up.
Even more compelling, given Japan’s increasing national defense needs, is Mitsubishi Heavy’s aerospace and defense business. The company manufactures the Patriot Advanced Capability 3 (PAC-3) missiles that are used to intercept and destroy incoming missiles. Orders have also been growing for terrestrial launch facilities for the missiles.
PAC-3s are manufactured under license from Lockheed-Martin. Changes in Japan’s arms export laws also allow Mitsubishi Heavy to export missile nose cones and command and control systems to countries like the US. The company also builds airplanes, such as Japan’s F-2 fighters, and ships, including destroyers.
Mitsubishi Heavy’s nuclear power plant business is the fastest growing non-military segment and I expect this growth to continue as nuclear power becomes increasingly important around the world. Management has been trying to lower costs; success on that front will help tremendously. Buy Mitsubishi Heavy Industries.
Markets
In light of global markets’ solid performances of late, you wouldn’t expect that many big money investors had adopted wait-and-see strategies. But they haven’t been big buyers; actually, many have initiated short positions, though many of those bets haven’t worked out so well.
My position has been clear since mid-August: Be selective but have more long positions than short (see Silk, A Needle in the Negativity, 8 August 2007). Although risks in the market have increased, buying will prove a much better approach than shorting this year–especially if we clear October fairly unscratched.
Follow the Fresh Money Buys list and stay well diversified.
Fresh Money Buys
Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):
There are better opportunities right now than Japan, which is why Japan has been ranked quite low in the Fresh Money Buys list for some time.
On the other hand, the negative sentiment surrounding the market offers an opportunity for long-term investors to pick some undervalued stocks, if only from a contrarian point of view. And no, I don’t think you’ll be walking into a “value trap.”
Big banks, in particular, have been the dogs of the Japanese market for a while now. They’re down around 20 percent from their June highs and now trade at valuations close to the 2003 lows.
Recent credit woes have also added to the already negative sentiment, even though Japanese banks have little exposure to overseas subprime mortgage problems and little risk in nonperforming domestic loans. Last time I checked Japan isn’t in the midst of a financial crisis.
Long-Term Holding Mitsubishi UFJ Financial Group (NYSE: MTU) has been hit particularly hard.
The main problems have been weak domestic lending demand and exposure to subprime loans. The latter is the most dangerous development–the company has reported exposure of ¥280 billion. This exposure must be taken into account, but the fact is it represents a small amount in the banks security portfolio, and management has acknowledged the problem.
The domestic demand issues are also well known and have to do with the economy’s slow pace in turning around. Recent political changes haven’t made things better; no one knows whether new Prime Minister, Yasuo Fukuda, will try to push forward the structural economic changes the economy needs.
But the growth rate of the Japanese economy continues to improve and will do even better if the rest of the world avoids recession and recovers next year. Buy Mitsubishi UFJ Financial Group.
Sumitomo Mitsui Financial Group (OTC: SMFJY) is Silk’s Alternative Holding recommendation for Japanese banks. Although Sumitomo Mitsui is a big bank, its overseas assets account for a little more than 13 percent of its total assets, the lowest percentage among Japanese megabanks.
It’s also shifted its strategy and now pays great attention to small-scale financing and commercial banking. A successful implementation of the strategy will give Sumitomo Mitsui great leverage in the eventual reemergence of the Japanese consumer. Buy Sumitomo Mitsui Financial Group.
Mitsubishi Heavy Industries (OTC: MHVYF) is the Portfolio’s non-bank recommendation. A diversified manufacturing and construction company, Mitsubishi Heavy has operations in a bevy of fast-growing businesses, including conventional and nuclear power.
Japan relies on nuclear power for its electricity needs, and Mitsubishi Heavy is one of the nation’s leading builders. It also builds plants beyond its borders, including in China.
The company has 24 manufacturing/sales facilities in China; though those operations currently represent only about 4 percent of total orders, the numbers trending up.
Even more compelling, given Japan’s increasing national defense needs, is Mitsubishi Heavy’s aerospace and defense business. The company manufactures the Patriot Advanced Capability 3 (PAC-3) missiles that are used to intercept and destroy incoming missiles. Orders have also been growing for terrestrial launch facilities for the missiles.
PAC-3s are manufactured under license from Lockheed-Martin. Changes in Japan’s arms export laws also allow Mitsubishi Heavy to export missile nose cones and command and control systems to countries like the US. The company also builds airplanes, such as Japan’s F-2 fighters, and ships, including destroyers.
Mitsubishi Heavy’s nuclear power plant business is the fastest growing non-military segment and I expect this growth to continue as nuclear power becomes increasingly important around the world. Management has been trying to lower costs; success on that front will help tremendously. Buy Mitsubishi Heavy Industries.
Markets
In light of global markets’ solid performances of late, you wouldn’t expect that many big money investors had adopted wait-and-see strategies. But they haven’t been big buyers; actually, many have initiated short positions, though many of those bets haven’t worked out so well.
My position has been clear since mid-August: Be selective but have more long positions than short (see Silk, A Needle in the Negativity, 8 August 2007). Although risks in the market have increased, buying will prove a much better approach than shorting this year–especially if we clear October fairly unscratched.
Follow the Fresh Money Buys list and stay well diversified.
Fresh Money Buys
Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):
- South Korea (electric power, banking)
- Hong Kong (real estate, publishing, infrastructure)
- Malaysia (ETFs)
- India (pharmaceuticals)
- Russia (telecommunications, energy)
- Taiwan (technology, telecommunications)
- Europe (oil, pharmaceuticals, industrials, communications equipment)
- Singapore (telecommunications, banking, industrial)
- Japan (banking, industrials)
- China (consumer, coal, power, oil, water)
- Macau