By Mary-Lynn Cesar for Kapitall.
The International Monetary Fund released its
of Japan's economy on Thursday, and the financial body says
that while the nation is slated to see high growth this year,
failure to realize the goals of its economic reform plan could
dampen future expectations and raise concerns over the country's
So far, Abenomics-the term used to describe Prime Minister
Shinzo Abe's economic policy-has placed Japan's economy on track
for 1.6% growth in 2014. A surge in consumer spending preceding
Abe's mandated consumption tax hike and an increase in business
investment drove the economy to faster-than-expected expansion in
the first quarter. As a result, the IMF revised its growth forecast
for Japan last week,
raising its projection
to 1.6% from 1.3%.
But the fund expects Japan's growth to slow to 1.1% in 2015 as
the country enacts Abe's third arrow initiatives and grapples with
a shrinking workforce. The IMF states significant structural
reforms to the labor market, risk capital provision, and
agriculture and services regulation are needed to move Japan away
from deflation and low growth in the coming year.
Abe's policies, the IMF notes, have potential to help the
economy in the long term, but certain factors, such as Japan's high
level of debt and uptick in energy imports following the 2011
earthquake, make their success uncertain. The body praised
new economic revitalization strategy
-the "third arrow" of his economic reforms-and called for its rapid
implementation. Per the plan, Japan's corporate-tax rate would be
lowered from 35.6% to under 30% in the coming years, companies
would be urged to drive up their ROE to match global figures,
deregulation would take place in several sectors, and the workforce
would bring in more women and immigrants.
The IMF's outlook on Japan inspired us to take a closer look at
Japanese stocks. We began with a group of stocks from Japan and
subsequently screened it for undervalued stocks with a
price to free cash flow (P/FCF) ratio below 15
The P/FCF ratio is a valuation metric that shows investors
whether a stock's price is high or low relative to its annual free
cash flow, which is operating cash flow minus capital expenditures
(money spent on equipment, upgrading infrastructure, etc.). A
company can use its free cash flow for a number of things, such as
paying dividends to shareholders, starting a share buyback, and
Our interest in stocks with low P/FCF ratios was two-fold: we
frequently like to search for potential investment opportunities
for value investors, and the IMF states in its assessment that
Abe's actions regarding corporate governance reforms could make it
easier for companies to use their cash more effectively.
For our final screen, we looked for stocks that were
rallying about their 20-day, 50-day, and 200-day simple
moving averages (
. We did this because even though Abe announced his new economic
revitalization strategy over a month ago, the response was warm,
with Nomura Securities' chief economist Tomo Kinoshita
The Wall Street Journal
that the proposed corporate reforms exceeded market
We were left with two Japanese stocks with low P/FCF ratios on
our list. Do you think Abe's corporate reforms will help these
companies get the most out of their cash? Use this list as a
starting point for your own analysis, and let us know what you
think in the comments.
Click on the interactive chart to view data over
1. Nippon Telegraph & Telephone Corp.
): Provides telecommunications services to residential and business
customers in Japan. Market cap at $63.87B, most recent closing
price at $28.08.
P/FCF at 12.13. The stock is rallying 1.57% above its 20-day
SMA, 6.59% above its 50-day SMA, and 18.97% above its 200-day
2. Sony Corporation
): Designs, develops, manufactures, and sells electronic equipment,
instruments, and devices for consumer, professional, and industrial
markets worldwide. Market cap at $18.05B, most recent closing price
P/FCF at 5.2. The stock is rallying 9.02% above its 20-day SMA,
11.22% above its 50-day SMA, and 5.71% above its 200-day SMA.
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