In a recent article by IBD about the attractiveness of foreign stocks, Dennis Stattman (a manager of the $60 billion BlackRock Global Allocation — ticker: MDLOX), commented that there is a lot to like in Japan. Dennis cited upward earnings revisions; corporate managers starting shareholder-friendly policies; and attractive valuations. He believes Japan is in the very early stages of a multi-year bull market.
Sanrio (TYO: 8136) (OTC: SNROF) shares have taken a beating the past several months and really got hammered last week — “blame” Goldman Sachs for the latter, as it appears that its post-earnings report casting undue pessimism and uncertainty on Sanrio’s business model fueled the selloff and compelled Morgan Stanley-MUFG Securities to publish a copycat note. (Sanrio’s statement emphasizing profit-focus and no plans to abandon lucrative licensing business.) Attracted to Sanrio’s high ROE, a weakening yen, and “Cool Japan” marketing in overseas markets that only solidifies the popularity and brand recognition of flagship character, Hello Kitty, I had the fortunate timing of building a position in Sanrio’s ordinary shares in Q4’12 ahead of a sizable run up in 2013. Following are some lessons learned from that profitable investment and the intraday 23% drop Sanrio’s shares suffered last Thursday.
I recently wrote an article published exclusively on Seeking Alpha, entitled, “Why GE’s Buyback is a Raw Deal for Shareholders.” Share repurchase programs are trumpeted out and rarely questioned. I believe that many, but not enough, investors understand that buybacks can be largely self-serving and hardly in shareowners’ best interests. I encourage you to read the above linked story (link visible in full article view) on GE and note the fact that the impact of share buybacks when looking at shares outstanding is very dismal; stock price performance is equally unimpressive.
Please see Seeking Alpha (“GE Dividend Still Taking Back Seat to Buybacks“) for my latest installment in the saga of General Electric’s (GE) reluctance to share the wealth with its shareholders. *Click “Read Full Story” below for hyperlink to Seeking Alpha.*
Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations (2010, Bloomberg Press), is an ambitious effort by coauthors Robert A.G. Monks, a renowned shareholder rights activist, and Alexandra Reed Lajoux, an M&A expert. They cover a lot of ground in around 540 pages, and state at the end of Chapter 1 that the book is intended primarily for institutional investors, adding that they would be honored if professors recommend their book along side other classics such as Security Analysis (review).
The book favors breadth over depth in many instances, but is rich in footnotes for further research. Students of finance and practitioners will find Corporate Valuation for Portfolio Investment a great book to read reference, while individual investors with no formal background in finance will in fact have much to gain from the chapters on financial statements, valuation methods, and the coauthors’ “philosophical framework” for valuation.
Lions Gate (LGF) reported a surprise Q1 loss of $64.1M or $0.54/share compared to earnings of $36.3M ($0.30/share) last year — note that adjusted earnings of a net loss of $13.7M ($0.10/share) missed analyst expectations of a profit of $0.04/share. The cash flow picture is not pretty either as the business was kept cash flow positive by a $243M senior revolving credit facility. While Carl Icahn continues to battle for control of Lions Gate, my message, which I’m sure I share with other individual shareholders, is “show me the money.” (Click hyperlink for 4/28/10 post discussing Icahn v LGF). Unfortunately, LGF is losing money, the Board is giving away money to management and the militia of advisors hired to thwart Icahn, and meantime, to prove a point, Icahn has lowered his bid to $6.50/share from $7/share previously.
Internet Initiative Japan (IIJI) (JP: 3774) is not a household name in the U.S., but it has carved out a niche in Japan in internet connectivity and related system services and outsourcing (essentially it is a high-tech ISP catering to businesses and government with growing potential in cloud computing and mobile access). Overnight in Tokyo it reported better-than-expected full-year earnings, forecast top and bottom-line growth in the current fiscal year ending next March (albeit on the soft/conservative side), hiked its dividend for the fiscal-year ended in March by 11% and is targeting an 11% hike for the current year’s dividend. IIJ surged in the afternoon session in Tokyo following its earnings release, reaching limit-up at ¥259,300 (ADR equivalent of $7.00) and closing at ¥245,000 ($6.61), compared its Nasdaq close $5.68 on Thursday. This is all good news, but it will likely get even better, much better, because IT investments in Japan have been largely held back, and IIJ’s board can take more of an initiative to enhance shareholder value, something for which I hope to be a catalyst.
Reuters (article in Japanese) reports that Goldman Sachs issued a report earlier this week that argues M&A will be the major theme for Japanese equities in 2010. Having a ‘macro’ investment theme for the start of each new year is a ritual for brokerages in Japan, although it seems no one ever has the resolve to action or follow through; and the M&A theme itself is not a new one. So Goldman repeats known information that Japan (equities) was overly victimized in the financial crisis and remains largely defenseless to external shocks. With ROE so low, domestic demand remaining sluggish, and overseas competition ever-intensifying, the best bet for Japanese companies is to merge and restructure. M&A/restructuring should boost top-line growth, says Goldman, which also should help margins, and therefore drive stock prices higher.
However, the longstanding problem with inward M&A is that reorganization is easier said than done (as heads, and tails in the form of non-core subsidiaries, tend not to roll in Japan), the volume of M&A has often disappointed, and the size of deals has been on the small side. Nevertheless, all of that means there is still great opportunity in Japan. The best opportunities appear to continue to be in smaller-sized deals, where there are plenty of gems, and in listed subsidiaries. Goldman is said to favor retail, machinery, services, land transport, non-bank financials, warehousing, and real estate — the underlying idea is that these industries are the most fragmented.
Bottoms-up then, as 2009 is winding down and 2010 is poised to be the year of M&A (at least thematically or in a macro sense).
More often than not, it is overseas factors that have the largest influence on trading in Japan. However, from time to time there is enough commotion domestically that also warrants the attention of investors. Unfortunately, the cacophony coming out of the government these days is more concerning than usual (e.g. Japan Post management/reform, debt moratorium, JAL, etc). But let’s not forget earnings season is here.
Following is a market summary of last week’s action courtesy of the Tokyo Stock Exchange:
Despite the decline in the American exchanges reflecting weak corporate financial statements, the market continued with slight gains from the previous week backed by the strong tone of the Asian stock market. Further into the week, rising prices of oil and other commodities in the commodities market led to buying centered around resource stocks as the market strenghtened. Heading into the weekend, while there were positives with the yen falling to the 91 yen-per-dollar level, easing concerns over deterioration in corporate export estimates, many uncertainties such as the reconstruction of JAL and the direction on the moratorium remained. In addition, a wait-and-see sentiment grew amongst investors as they chose to wait for the announcement of July-September period financial statements by domestic corporations. As a result, the market struggled to make any headway.
Pricey, and Japanese stocks, are typically not heard together in the same sentence. However, since last September’s market rout, earnings have deteriorated to the point that the Nikkei 225 is trading at over 175x forward earnings; 10.1x on a trailing basis. No doubt the ratio will swell some more, potentially going negative for a quarter, before it begins to ease. For some time now, I have believed that Japanese stocks are being priced fairly by the market. Still, it remains true that money managers the world over see deep value in Japan.
In order to prevent this article from getting long winded I will summarize my position as follows: (1) Recent trading has been ostensibly positive given the strong rally in percentage terms off the bottom, but the action has been quite thin; which leads me to point (2) in that the 9,000 level has proven pretty elusive due it being right about the middle point of last year’s finish and this year’s high (remember the N225 flirted with 6,000 a month ago); and (3) buying up headline exporters and bank stocks is the easy and obvious way to play, but lack of participation and depth in this rally will surely create a situation of more range bound trading between 7,000 and 9,000. Therefore, with all eyes on the U.S., and with the country’s financial magicians seemingly running out of rabbits, I would exercise caution at current levels. Aside from media cheerleading, last check the economic negatives far outweighed the positives.
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