Don't Forget About Japan, Fund Managers Say

The country's companies are in better shape relative to their peers, and stock pickers see attractive targets.
By Gregg Greenberg ,

NEW YORK (TheStreet) -- Much to the frustration of Japan's exporters and government officials, the Japanese yen spent much of 2010 strengthening versus the U.S. dollar.

Nevertheless, the country's currency headaches haven't slammed its stock market too much as Japanese equities, as measured by the

iShares MSCI Japan Index

(EWJ) - Get Report

, have returned 5% this year compared with a 5.75% increase for the

S&P 500

. And despite structural woes in the Japanese economy, some fund managers say there are still gains to be had in Japanese stocks for those who know where to look.

"Japan's major international companies are much leaner and have better finances than in the past," says James Moffett, portfolio manager of the

Scout International Fund

(UMBWX) - Get Report

. "Against this trend, however, are poor demographics, which limit domestic demand growth. The swing factor could be the yen, which may be weaker next year. Our picks are generally export-oriented or multinational companies like

Nidec

(NJ)

and

Honda

(HMC) - Get Report

, which we view as a play on modest worldwide growth."

"The financial crisis in the U.S. is driving the country to lean towards an inflationary response, which in my view is likely to jolt Japan out of their deflationary trap," says Michael Kass, portfolio manager of the

Baron International Growth Fund

(BIGFX) - Get Report

. "If so, the yen would likely finally begin to weaken and Japan's export economy could surprise to the upside, particularly given Japan's proximity to emerging Asia and high value-added technology and manufacturing capabilities."

TheStreet

searched for three giant Japanese stocks with the help of Kass and Moffett.

Nidec

(NJ)

Kyoto-based Nidec is one of the world's largest manufacturers of electric motors, machinery and optical components. The company's small precision motors are used for hard disk drives, laser printers, copiers, mobile phones and a host of other devices. It also offers mid-size motors, which are used in automobiles -- there are more than 40 small motors in every car in addition to the one under the hood -- as well as various electric household appliances and industrial equipment. And for all those photographers out there, Nidec also supplies the camera industry with shutters and lens units.

Nidec has plants in Japan, the United States, Singapore, Germany, Thailand and the Philippines. The company is also expanding their operations in China, most recently establishing a new manufacturing subsidiary in Shaoguan, Guangdong Province.

"Nidec is the dominant manufacturer of the little disc drives that go into everything from

Apple

(AAPL) - Get Report

iPods to computers. They also make small to large motors for automakers. They are in the process of expanding their position in the industry as well now that they have purchased

Emerson's

(EMR) - Get Report

motor business. They may be a little challenged in the disc drive sector because flash memory is getting cheaper and cheaper, but they are still an incredibly well run company with strong growth prospects," says Moffett.

Fanuc

(FANUY.PK)

Fanuc makes and maintains robots around the globe, specializing in robots used in manufacturing plants. The company's products also include programmable logic controllers, industrial lasers, precision molding machines, and machines for milling, boring, drilling and tapping.

"Wages are increasing in Asia for the first time and that means manufacturers need a way to combat wage inflation. They are turning toward industrial automation and robotics, which is really the substitution of capital for labor. This is a long-term theme and Fanuc is the number one player in this area, as well as one of the best-run companies in Japan," says Kass.

Sony Financial Holdings

(SNYFY)

Sony Financial Holdings, a subsidiary of electronics giant

Sony

(SNE) - Get Report

, is primarily a life-insurance company. The company's non-life insurance products consist of automobile, medical and cancer, fire, marine, and automobile-liability insurance policies. Outside its core insurance businesses, Sony Financial also offers customers deposit products and loans, including car and mortgage loans.

"Sony Financial Holdings is consistently gaining share and would benefit greatly from even a modest rise in Japanese interest rates, which we see as likely if Japan shifts from deflation towards an inflationary bias," says Kass.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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