lessons from 2013 #3

3. The yen will not save you. This holds true unless you are Mitsubishi motors or Mazda. The yen has weakened, but halfway through the 2013 fiscal year, very few companies are blowing the lights out with surprising profits. Instead the diversification of production over the last 5 years has insulated many companies from the vagaries of foreign exchange. 

What we have here is a failure to inflate. So you get what we had here last week. Which is the way he wants it. Well he gets it. 

The yen cannot save japan. It is now undervalued and thus will have a tendency to strengthen barring outside interference. 

We have entered the knowledge economy, whether japan wants to recognize it or not. 

The smartest country wins. The more you send kids to graduate school the better chance of survival. The US knows this already. Japan thinks it can provide a quick fix with the yen. It can't.

If japan wants to compete with china at its game, good luck. But this is low stakes poker compared with what is out there for the intelligentsia to take. 

Boys, be ambitious. This still holds true. 

lessons from 2013 #2

2.  Early stages of a rally are powerful, violent and extremely profitable. 

Taking a position in monex or Mazda or any of a hundred other stocks geared to a cyclical upturn would have been prudent at the start of the rally in December last year rather than sticking to value stocks with limited downside risk and stable earnings through 16 years of deflation. I will have to remember this in another 10 years when the next such opportunity arrives. Such is the lament of a value investor; to watch the greatest party in years erupt and be stuck with your cousin for a date. 

lessons from 2013 #1

Success in investing is measured in years and decades rather than in the short term. And in order to get to the ray dalio stage of perfect clarity and benevolent omniscience we must from time to time autopsy the past and gird ourselves for the future. 

So with that in mind I present the 10 things I learned, relearned and possibly have already forgotten in this past year. 

1. Monetary policy trumps all - Abe has arguably done nothing of significance since taking over with the notable exception of appointing Kuroda as the boj governor. The nikkei movement can nearly all be explained by yen weakness, which in turn can nearly all be explained by QQE from Kuroda. 

so in 2014 my eyes will be on Kuroda first and foremost, with Abe assigned a footnote in this japan revival white paper

Nafco 2790

Been spending a good part of my Sunday looking into Nafco, a Kyushu based home center operator with dreams of expansion nationwide. 

The stock has lagged the recent rally significantly after a downward revision in November which they blamed on the weather. 

Now, I am of the mind that rather than talk about the weather one should do something about it. If that isn't possible then don't bother to talk about it at all. 

I suspect nafco's problems may run a bit deeper than cloudy skies. As they expand into new territories they are bumping heads against formidable rivals such as komeri. A scan of the message boards also indicates the level of service customers receive leaves something to be desired. 

Now if this is not a spectacular business, it is at least a spectacular price. Assuming he company undershoots this year's guidance and only earns 200 yen eps, it is still trading at 7.5x PE. And with a dividend payout of 36 yen or 18% of eps, the potential for an increase is formidable. 

Oh, and it trades at 3x ev/ebitda. 

And the founding family owns more than 20% of the stock. Say what you will about Japanese management, it is clear when the person running the company has their fortune on the line, the results are positively affected. 

It may not be sexy, but considering the boom in new home ownership in japan, you could be in a lot worse stocks than a DIY and interior design company. 

I will be placing my order to buy on Tuesday. 

reset, relax, rethink

The tax rate rise has given me a wonderful opportunity. I have sold nearly everything I own and have now cleared the proverbial mental slate to allow for a fresh approach to my portfolio rather than hanging on to a few dogs that were hurting a rather decent year. 

So goodbye and good riddance Watabe wedding, the cost impact of the weaker yen was not offset by a wealth effect send ing young couples to overseas weddings as anticipated. 

Sayonara Kawasaki Kinkai, you run a great operation in a structurally weak industry and so we must part. 

Au revoir Geo holdings, you are supremely cheap, but tsutaya has you beat and video stores do not have a bright future. 

Now, some of you stellar superstars that have aided my bank account in 2013 may make a reappearance in 2014, but there are no guaranteed spots. That means you Sakai moving, maruzen Kitchen, Roland dg, dic, mitani and Fukuda denshi! Consider yourselves warned. 

There are a number of bright starry eyed candidates knocking on my door. With a little investigation I hope to be back in in full from early 2014. 

If you are going to invest in Japanese stocks, you sure as hell better be invested from January to April. It's just about the most outstanding seasonal pattern of anywhere I have ever encountered. 

Happy hunting and if you want my thoughts on individual stocks just drop a comment and I will respond. 

Maruzen 5982 - The Last Great Value Stock?

The shares have had a decent run, not much removed from the Topix, but with so many stocks now trading well above their historical valuation levels, this one still looks exceedingly attractive.





The stock trades on 7.7x current company guidance, will generate 9-10% ROE and trades at a P/B of 0.7x. Considering Maruzen has steadily increased sales over the short, medium and long term, all the while maintaining 10% operating margins, it is my contention that a strong management team is at the helm. Fidelity is a 9% shareholder, but otherwise there appear to be very few foreigners involved in the stock.



The vast majority of Maruzen's business comes from kitchen equipment for large scale cooking needs. The company is now targeting Y50b annual sales over the medium term, after surpassing its previous Y40b target last year. Given the expected pickup in the domestic economy, one could reasonably argue the 1.2% decline in sales projected for fiscal February 2014 is overly conservative.

I think the stock could trade at 1600 or potentially higher in the next 12 months. A key impediment is a lack of liquidity, which is why any news of a stock split or change in trading units (currently 1000 shares) would probably be a major catalyst to the upside.

Komehyo 2780

I've been an owner and fan of komehyo since around the 350 level when it was trading 6x Pe and looked like a nice sleepy value play with moderate growth prospects. The company is an operator of high end used goods shops with some prime real estate in areas like shinjuku. Walking around a shop is pretty mundane, although the inventory of Louis Vuitton handbags is truly shocking.

Recently the stock has been on fire and is on the brink of crossing the 1000 mark. January sales were strong at up 30% or so, but then again there have been some new store openings and this is aggregate rather than sss data.

I can't help but think he single biggest reason for the rerate was the ipo of rival kaitori okoku 3181 where the stock trades at 14x Pe.

I am looking to exit my position shortly once momentum looks to have run its course but will be sad to part with such a dear friend.

Given the strong slate of ipos this year there may be some fertile hunting grounds. Oisix looks interesting considering rock fields is also already a listed entity.

Watabe Wedding 4696

Watabe Wedding  4696
Bought at  706. Current 755. Target 1100



With the market already on a tear it seems reasonable to look into laggard value plays that would benefit from a domestic economic recovery.

Watabe Wedding presents such an interesting value opportunity.

The company is primarily engaged in arranging high-end overseas weddings for Japanese couples. Although they are also active in domestic weddings and working to expand in Asian markets such as China.

With the yen weakening so rapidly, certainly the risk is clear that the attractiveness of taking a large group of family and friends to Hawaii will wane. However, there is a reasonable argument to be made that the gearing from a boost in general confidence among the Japanese will be larger than the negative impact from the yen. Certainly the marriage market has seen a substantial shrink in the last few years along with the depressed Japanese economy.

Then there are the valuations.  While a great many Japanese stocks have recovered to 1x P/B, Watabe still lingers at 0.53x. It also trades at 10-11x projected earnings for this year, although having achieved 84% of guidance in the 3Q, there is a substantial possibility of an overshoot, it would seem. Then there is the dividend, at 30 yen, the stock yields 4%. The payout has been stuck at this level for a number of years as earnings have flattened out, however once revenues start to pick up again, expect the company to start lifting payments once again.

And on  cash flow, the stock trades exceedingly cheap at 2.6x EV/EBIT.

The technicals have also turned positive with the upward momentum starting to build after a significant lag vs. the overall market.
 


Sales Trend



OP Trend

   
Dividends

Valuations

Primum non nocere - First, do no harm to one's portfolio

I am embarking on a new path with this blog to outline my thoughts on deep value stocks in Japan with the hope of sparking a discussion on stocks at a time when interest in my adopted home is on one of its periodical upticks.

It makes sense to start with what we know, or think we know, about investing in Japan
1) First, do no harm - minimize downside risk above all else, with the occasional lottery ticket exception that is priced right.
2) Value works in Japan, more so than elsewhere - a simple low P/B strategy is about all it takes to beat the indexes on a consistent basis, although there are plentiful ways to supplement this strategy.
3) Macro and micro differ - the decline of Japan is closely tied to the aging population and sclerotic major companies made famous in the 1980s, but a host of small cap companies are on a different trajectory altogether
4) Momentum matters - don't catch the falling knives, because things can always get cheaper in Japan.

In coming posts I hope to discuss some of my value picks I own and some I hope to own at the right price in the future.

Stocks I own:
Kuriyama 3355
Daiwa Industries 6459
Sakai Hikoshi Center 9039
Kawasaki Kinkai Kisen 9179

Stocks I am watching
Kato Sangyo 9869
Softbank Technology 4726