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Japan Small Company Stocks
Japan Small Company Stocks in my opinion can offer very good value. For several years now I have been facilitating the purchases of these shares on Japanese exchanges.
My approach to selecting Japanese stocks is to seek out extremely attractive valuations on the basis of Price to Earnings Ratios, Price to Book Values, cash on hand, financial leverage, and, to a very modest degree, growth. I pay no attention whatsoever to industry type or business prospects. I try not to prognosticate on what might happen to a particular business, instead focusing on what I do know right now. I use my own unique rating system. I have in the past been able to assemble portfolios featuring average Price to Earnings Ratios of under 7 X, average Price to Book Values of under 0.7, and Cash to Market Capitalization ratios of 52%. I do not warrant that this method is infallible, but it is based on the widely respected Benjamin - Graham school of stock selection, which I believe offers a disciplined, rational framework for making investment decisions
This methodology relies on the power of large numbers to ensure that the occasional bad apple does not ruin overall investment performance. As a true diversification for wealthier clients, these companies are hard to beat. You can buy the shares directly in Japan, on the Tokyo Stock Exchange, as well as on other smaller regional exchanges. After purchasing the shares, there are no management fees to pay. You own the shares directly, not via a fund. I do not insist on managed accounts either. See my Japan Investment Fact Sheet for details.
These businesses span every conceivable market, from manufacturing to services, often are highly specialized, and can represent industries that don't even exist in much of the rest of the world. For instance, I have invested clients in the shares of Japanese 'Cram Schools' - specialized educational institutions that prepare students for key exams and improve grades. Frequently, I see Canadian firms which trade at valuations at least double that of virtually identical Japanese counterparts.
Other investors have seen the same bargains. This is an excerpt from my Newsletter 'Focus on Investment$', Issue no. 6, Spring 2005:
Could Japan at last be back? Over the past 12 months, the benchmark Nikkei 225 index has returned 32%, nearly twice as much as U.S. blue chips. And although its market has retreated over the past few weeks (as have stock markets around the world), Japan's economic fundamentals are still improving. Its trade with China is booming, and both corporate profits and consumer spending are getting stronger. The country's gross domestic product grew a surprising 5.6% annualized in the last quarter.
But the real attraction of Japan, says veteran fund manager Peter Cundill, is value. "The only market in the world that has a whole lot of cheap securities is Japan," he says. And when Cundill says something is cheap, he means seriously cheap. The 65-year-old native of Canada--he spends five months a year in London and the other seven in the U.S., Canada and Asia--is a devotee of Benjamin Graham's classic approach to stock valuation. Among other things, that means he sticks to companies trading for less than the shares would be worth if the firm were liquidated.
Japan is Still Cheap. Jonah Freedman, Money; July 2004, Vol.33
It has always occurred to me that the individual investor has a tremendous advantage over large funds: they can take a position in a small firm, and it will still have a meaningful effect on their overall return. Large funds need to invest at least a few million dollars in any one stock for it to have any effect on their returns, and that is not always easily accomplished with small firms. But for an individual investor it is not a problem. To my mind, $1 million invested in 40 Japanese small cap stocks with the kind of cheap valuations discussed earlier is an attractive prospect. Furthermore, Japan is a large commodity importer, and as a country will benefit from lower commodity prices. In the event that commodity prices were to retreat sharply, both Canadian stocks and the Canadian Dollar would likely fall sharply, even as the opposite occurred with Japanese stocks.
To learn more, please refer to my Japan Investment Fact Sheet.
Manulife Securities Incorporated
11 Bond Street, Suite 104
St. Catharines ON L2R 4Z4
Toll-Free: 1-866-864-9652
Telephone: (905) 704-6650
Email: scott.swallow@manulifesecurities.ca
The information contained herein is for Canadian residents only and does not constitute an offer to sell or a solicitation in any foreign jurisdiction, or in any Canadian jurisdiction where Scott Swallow, is not qualified to effect sales.
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