MILLBURN, N.J. (Stockpickr) -- Japan has suffered a series of disasters -- earthquake, aftershocks, tsunamis and nuclear accidents -- over the course of the last week. The Japanese stock market is down dramatically in the wake of these unfortunate events. I have refrained from making any Japanese investment or trade, with one or two brief exceptions, for nearly 20 years, but I am now taking a more serious look at opportunities that are presenting themselves as a result of the aforementioned events.
As a matter of background, I spent an extensive amount of time in Japan from 1986 to 2001, with particular focus on my expatriate years of 1987 to 1989. My first son was born there. While my Japanese is a bit rusty, I have an excellent grasp of the culture, history, business and economics of Japan.
Japan was rebuilt by allied occupational forces after World War II. Even today, the U.S. has a large naval presence in Japan. Japan's post-war coming-out party, so to speak, was the 1964 Summer Olympics in Tokyo. It was from that period on that the country became a major exporter of technology, cars, automotive parts, consumer electronics, commercial ships and pharmaceutics.
For the most part, Japan is mercantilist in nature. The country avoids importation of foreign-manufactured products at all costs. Even if foreign-produced finished products are cheaper or of better quality, the Japanese will likely not import them. There are three major exceptions, in general, to that trade bias: raw materials, petroleum and luxury goods. In order to rebuild the country, the Japanese government will first throw money at domestic companies such as Komatsu and Sumitomo Heavy, but those companies cannot be invested in directly by American investors.
So we need to seek out those companies that will both a) benefit from the massive reconstruction and b) trades in the U.S. markets in ADR, or American depository receipt, form.
The first such Japanese company that comes to mind is
. Kubota is first and foremost known for manufacturing industrial, farm and construction machinery and equipment. To that extent, Kubota's American competitors would be
. Kubota is also engaged in the design and construction of water and environmental systems, which will be in great demand in Japan. Lastly, Kubota fabricates materials, pipes and electrical equipment for infrastructure projects.
Kubota is expected to grow earnings by 13% in fiscal 2012 (note that in Japan the fiscal year will end in March). With a shortage of machinery likely to occur because of increasing demand, Kubota is going to see earnings grow by at least 20% in fiscal 2012 to at least $3.10 per share. The stock should exceed its recent peak price of $55 and rise to above $60.
Another Japanese company that will benefit from the rebuild in Japan that is also traded in ADR form is
, a diversified electronics company. In its consumer products division, Kyocera produces a wide variety of products such as wireless phone, kitchen utensils and stationery. Its larger business-to-business segment focuses on industrial and commercial products such as information and telecommunications equipment medical and dental devices, ceramics, electronics and semiconductor components, LED lighting, automotive components, lenses, cutting tools and chemicals. In addition, Kyocera produces solar power-generation systems for commercial and residential use. Kyocera clearly has a full array of products that will be necessary for the reconstruction of Japan.
Kyocera, like Kubota, will experience better than the expected 6% earnings growth that analysts currently expect for 2012. The stock sells at a discount to the market multiple, which for a company of Kyocera's size and quality is not enough. As a result, Kyocera could rise to at least $125 within the next year. I would also mention that Kyocera has an excellent balance sheet with nearly $5.3 billion of net cash and short-term investments as of the end of its 2010 fiscal year. That is nearly a third of the company's market capitalization.
A third Japanese ADR that comes to mind is
( HIT), which is primarily known as a consumer electronics company. Many homes and buildings will be built or repaired in Japan requiring home appliance and electronics. More important, Hitachi also engages in producing a large line of commercial and industrial products. In this business segment, Hitachi offers information technology solutions; electronic devices; industrial chemicals and materials; cabling; public and urban transportation systems, logistics and instrumentation; medical, health care and life sciences machinery; and environmental, power and industrial systems and equipment. Hitachi is uniquely positioned to benefit from both the commercial and residential rebuilding which will take place.
Analysts expect Hitachi's earnings to decline in 2012. I find that hard to believe given the massive stimulus that will be unleashed upon the country. Furthermore, as is the case with Kyocera, Hitachi sells at a discount to the market multiple. I value shares of Hitachi at least at their recent high of $65.
We can also go with a fund strategy. Two exchange-traded funds give you diversified exposure to the broader Japanese markets. The most actively traded Japanese ETF is the
iShares MSCI Japan
, which focuses on large-capitalization Japanese stocks. The iShares family of funds also offers an ETF, which directly correlates to the Tokyo Stock Price Index, or TOPIX: the
iShares S&P TOPIX 150
. I would note that the iShares TPIX 150 is far less actively traded and hence has less liquidity than the iShares MSCI Japan.
I am going to pass on both of those ETFs in favor of a closed-ended fund. The fund I have my eye on is the
Japan Smaller-Capitalization Fund
. As its name implies, this fund focuses on smaller-cap companies. My opinion is that any massive effort to rebuild Japan, especially with governmental stimulus, will be focused not just on the large companies as I mentioned before but also on smaller and regional companies. The Japan Smaller-Cap Fund will enable investors to benefit from the spreading of reconstruction money across the entire country and economy. I would also note that this closed-ended fund trades at a small discount to net asset value of about 2%. In other words, for every $98 you invest in the fund, you are getting $100 of assets.
The Japanese market and its related stocks and funds are quite heavily oversold. Opportunities are presenting themselves, but there is no urgency to rush in right now. The situation in Japan, especially as it relates to the reactors of the Fukushima Daiichi nuclear power plant, is very tenuous. A further deterioration of the condition at that facility will likely lead to further market weakness. A resolution of that crisis will likely mark a stabilization of the financial markets. However, we cannot predict what outcome will occur or when. We do know that the road to recovery will be long and protracted.
Hence, the strategy for opportunistic stock pickers is to identify some target stocks or funds now and be prepared to act when we have more clarity as to the resolution of the nuclear crisis, because that will mark the beginning of the reconstruction process.
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort was long DE, CAT and JOF, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
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. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.