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SKARBECK: Japan's rebuilding effort offers bargain opportunities

March 19, 2011

Ken Skarbeck InvestingThe terrible disaster in Japan has the attention of governments and populations across the globe. The No. 1 concern of the Japanese government is the mobilization of the humanitarian effort to meet the immediate needs of survivors. Establishing sources of food, shelter and other basic services are top priority. Later, the task will become one of cleaning up and, in the longer term, a massive rebuilding effort.

Japan is an industrious nation. The Japanese people’s mannered and almost stoic behavior, even in the face of this catastrophe, underlies their cultural determination. This is one of the reasons we have been buying stocks in Japan.

Of course, for some time, the Japanese economy has been something of an enigma, with the investment media regularly commenting on the country’s 20-year bear market. Back in 1990, at the peak of Japan’s economic prowess, a group of Japanese businessmen bought the iconic Pebble Beach golf course near Carmel, Calif. Many in America viewed the sale of that signature piece of real estate, for an exorbitant $820 million, as the end of an economic era for the United States. Everything henceforth, they thought, would be “Made in Japan.”

As it turned out, it was quite the opposite, with the moment coinciding with a peak in Japan’s global economic stature. (Ten years later, the heavily indebted Japanese owners ended up selling Pebble Beach for a $350 million loss to an investor group that included Clint Eastwood and Arnold Palmer.)

Japan’s economic and demographic troubles are well-known. The Topix index of 1,666 Japanese companies has fallen 73 percent from its historical high set in December 1989. Japan’s debt-to-GDP is over 200 percent (although most of the debt is held by its high-saving citizens) and the country will run a budget deficit near 10 percent this year.

The country has battled deflationary tremors for years by maintaining very low interest rates—a fate some observers have predicted will befall the United States. More recently, China passed Japan to become the second-largest economy in the world.

The yen, Japan’s currency, is also a factor when buying stocks in Japan. The government has followed policies to weaken the yen so Japan’s export-driven economy is competitive. So far, they have been unsuccessful as the yen has risen versus the dollar. Following the Kobe quake in 1995, the yen rose sharply as Japan repatriated assets held in foreign countries. Many traders, who have been bearish on Japan, have been burned shorting the yen.

All these pessimistic factors combine to make Japan one of the cheapest stock markets in the world. And bargain-hunting investors understand that undervalued opportunities would not be available if everything were rosy.

For example, we own shares in Roland Corp., a manufacturer of musical instruments about 100 miles southwest of Tokyo. The company has a market value of $300 million, or less than one-third of revenue of $1 billion. Roland has $231 million in cash on its balance sheet and is valued at 40 percent of book value. Total liabilities of the company amount to only $195 million. The stock pays a dividend that yields 3 percent, and the stock, currently quoted at $10 per share, trades well below the $30 it sold for back in 2006.

Economically, the next couple of quarters will be tough for Japanese citizens. But we wouldn’t bet against their resolve to rebuild their country.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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