The land of the rising sun's economic fortunes are turning
Prime Minister Shinzo Abe's aggressive monetary policies,
known as "Abenomics," are starting to work their magic on
theeconomy , creating an opportunity for forward-thinkingstock
First-quarter results indicate Japan's gross domestic product
grew 3.5%, sparking hopes that a recovery is underway. Exports
grew 3.8%, driven by strong autosales and the weaker yen, which
has fallen 20% against the U.S. dollar since November.
Abe's policy of weakening the yen, major fiscal spending and
generating 2%inflation by 2014 has sent the Japanese stock
markets soaring higher. The Nikkei has jumped 46% since Abe took
Leading Japaneseeconomists are projecting strong growth for
the next three years thanks to Abe's policies. I think these
changes are strong signals for investors to look for opportunity
within Japan. My eyes are on this pair of leading Japanese
Boasting amarket cap of $41 billion, this company is a leader in
the camera, copier and printer markets. Its price-to-earnings
(P/E ) ratio of under 15 is below the S&P 500's P/E of nearly
18, but itsshares have dropped 8% thisyear .
The company has a solid financial position, averagedebt levels
and expandingprofit margins . So what is creating thebearish wave
in the shares?
My first thought was Canon's products may be becoming
obsolete. However, this isn't the case.
The copier and printer business may be slowly sliding into
obscurity as society moves away from paper and toward
screen-based technology, but this isn't going to happen
overnight. These businesseswill probably enjoy many more years of
Currency rates are the company's topissue . Canon earns about
80% of itsrevenues from exporting, so volatility in the yen
affects revenues andearnings regardless of the company's actual
performance. The latest currency decision from the Bank of Japan
to leave its rate policyunchanged may be adding some stability to
the stock price.
With a 4%dividend , Canon looks like a solid long-term buy.
Technically, shares have shown tight range volatility this year.
The price has spiked and fallen from more than $38 to a low in
the $34 area. In fact, a quadruple bottom has formed in the $34
range, creating a support-buying opportunity on the chart. My
12-month target is $40.
This once-derided company has become a kingpin, currently ranking
as the world's top-selling automaker.
In fact, its latest quarterly profits were blowout positive,
as fourth-quarternet profit doubled to more than $3 billion.
Again, this is due primarily to Abenomics devaluing the yen.
Strong sales of the Avalon sedan and Tacoma truck in the United
States also helped boost profits.
The company's forward P/E is about 13, and operating profits
have been projected to increase 23% over the next two years.
Technically, the stock price has retreated into my value buy
zone, creating positive odds for an upward move. My 12-month
target is $130, with stops presently at $110.
Risks to Consider:
These are both solid companies, but they're hugely affected
by Japanese politics and the price of the yen. The primary risk
for both companies is that Japanesemonetary policy may change to
adversely affect exchange rates, which would hurt profits. Be
sure to always use stops and position size properly wheninvesting
Action to Take -->
I like both Canon and Toyota as buys, thanks to their solid
fundamental and technical outlooks.
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