Why I’m Prospecting for Stocks in the Land of Rising Value

Japan has been in the headlines for all the wrong reasons, namely for the recent stock market drop. When the Bank of Japan (BOJ) decided to hike interest rates by only 0.25%, it sent markets into a tailspin from Tokyo to New York, as I mentioned last week.

That’s because this minor policy change triggered a massive risk-off moment in global markets as the popular yen-carry trade quickly unwound.

Japan’s TOPIX stock index plunged 12% in a single day. And at the recent low, the TOPIX was down more than 23% from its mid-July highs.

Such a big pullback in a short period of time always gets my attention. I always dig a bit deeper to see if there’s a bargain investment in the making.

And in the case of Japan, I believe there is an interesting buying opportunity. Here’s why.

The land of rising dividends and buybacks

The stock-market headlines about Japan were much more bullish last year, signaling longer-term changes for the better.

The Tokyo Stock Exchange (TSE) last year decided that all listed stocks trading with price-to-book ratios of 1x or below should come up with a plan to boost their book value.

The initiative is aimed at so-called “zombie” Japanese companies that have regularly traded at low valuations.

In fact, 50% of stocks in the prime TOPIX section of the TOPIX trade at less than 1x book.

As a frame of reference, the S&P 500 Index has an average price-to-book of 5x.

To retain their prime TSE stock listings, companies in Japan have responded, for the first time, with serious shareholder-friendly reforms.

This includes extensive stock buybacks and divided payout raises, as you can see below.

In response, over half of all at-or-below-book-value Japanese stocks have disclosed plans to either boost dividends (58%) or buy back shares of their own stock (23%).

And investors have responded positively.

Since the TSE laid out its directives in March 2023, stocks in Japan that plan to boost dividends gained 41% by the end of June. Stocks planning buybacks are up even more at 46%.

Meanwhile, the average Japanese stock is up just over 16% during the same time frame.

Buffett’s a believer in Japan Inc.

Warren Buffett made headlines last spring when he reveled that he boosted his ownership stakes in five leading Japanese stocks: Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp.

Always willing to be greedy when others are fearful, Buffett started buying these five major Japanese trading companies during the 2020 pandemic. Smart move!

And just a few months ago Buffett upped the ante, raising his stake in the five Japanese stocks to 7.4% of Berkshire’s $280 billion stock portfolio.

He explained to CNBC that, “They were companies that I generally understood what they did. Somewhat similar to Berkshire in that they owned lots of different interests. And they were selling at what I thought was a ridiculous price.”

So, if the world’s greatest investor sees value in Japan’s stock market, that’s good enough for get me to get interested too.

Not to mention that those new shareholder-friendly reforms are now boosting Japan’s stock market values even more.

There’s no easy way to screen for only Japanese stocks, but the TradeSmith software developers are working on it. In the meantime, the list of Japanese companies trading on U.S. exchanges as American Depository Receipts (ADRs) includes brand-name giants like Canon (CAJPY), Sony Group (SONY), and Toyota Motor Co. (TM).

For instance, I looked up Canon from the list above and here’s a screen shot of the TradeSmith stats on the stock.

But, be aware that many Japanese stocks, including some ADRs, are listed in the Pink Sheets. That means the stocks may not be as liquid as Sony, Toyota, and others. Plus, our data may not be as comprehensive on these stocks.

But it’s a great way to start prospecting among some of Japan’s biggest blue-chip stocks, many of which are trading at bargain prices these days.

Mike Burnick’s Bottom Line: The land of the rising sun has also become the land of rising dividends and stock buybacks. And these shareholder-friendly reforms likely mean higher stock prices to come in Japan, which is why these stocks are on my radar.

Good investing,

Mike Burnick
Senior Analyst, TradeSmith