I've been looking at stocks since I was in high school, back in the late 1970s. I eventually chose to turn my fascination with investments into a career. I figured stocks represented the single-best path to wealth creation, thanks to one simple statistic: If you hold an investment for an extended period, then history shows that riskier investments will generate better returns. This means during any 20-year period going back to the GreatDepression , stocks always outperformed bonds , and bonds always outperformed cash. Because I was planning on a 50-year career, I was well prepared for short-term plunges, with the expectation that stocks would make up lost ground -- and then some -- during the subsequent decade.
That axiom still applies here in the United States. The S&P 500 has more than doubled in value since 1990, even with the gut-wrenching past few years.
But for Japan, that axiom is no longer true...
Frankly, it's hard to see how Japan's Nikkei index will ever revisit the 37,000 mark it reached in 1990 -- at least in our lifetime. It would take an unimaginable 350% upward move. Sure, small but fast-growing markets can generate this kind of gain within a few decades, but Japan is a mature economy with far too many demographic and fiscal headwinds. And yet, for contrarian investors, this market holds some tremendous bargains. These bargains involve companies that are thriving in the global economy, even if their home country's too-strong currency makes life difficult for exporters.
Focus on banks
While most global banks were making loans to debt-addled governments in Europe, Japanese banks steered clear and will not likely need to take write-downs if Europe goes into a deep funk. This is hardly an endorsement for Japanese banks, but they do possess a lot less downside risk than their western counterparts. Meanwhile, they are strikingly cheap by a range of measures.
Japan's largest bank (in terms of assets), Mitsubishi UFJ Financial Group (NYSE: MTU ) , hit an eight-year low this week (Nov. 27). Though it was once valued at more than $200 billion, it is now valued at just $57 billion. Meanwhile, this bank generated an eye-popping $49 billion in free cash flow in fiscal (March) 2011, according to Thomson Reuters. Mitsubishi UFJ Financial has one of the premier providers of financing for intercountry trading transactions, providing shippers, manufacturers and other financial-services firms with logistical capital. In the first six months of the current fiscal year , the bank posted $9 billion in net income , or about $18 billion when annualized. This means it trades for a little more than three times annualized income.
Investors interested in the Japanese banking sector should also check out Mizuho Financial (NYSE: MFG ) , Sumitomo Mitsui Financial Group (Nasdaq: SMFG ) and Nomura Holdings (NYSE: NMR ) . These bank stocks also hit fresh lows this week, erroneously tied to the widening crisis in Europe.
Toyota: down, but not out
Toyota Motor (NYSE: TM ) remains the world's largest automaker and, after shedding $100 billion in market value since 2007, the stock is now also a bargain. To be sure, the weak global economy has crimped financial results during the past few years. Toyota generated $47 billion in EBITDA in fiscal (March) 2007 and $48 billion during fiscal 2008. This figure has slid to just $20 billion in each of the past two years.
Yet it's important to remember that Toyota's engineering department may be the most innovative in the industry. For example, the company is on track to sell more hybrids in 2011 than the rest of the auto industry combined. Look for a series of Prius spin-offs to hit global showrooms in coming quarters, which should help the company maintain this lead. Meanwhile, Toyota is quickly boosting its manufacturing presence in lower-cost countries and shedding capacity in Japan. That's why analysts think earnings per share ( EPS ) can rise more than 100% in fiscal (March) 2013 to about $6.25, even with sales projected to grow less than 10% in the same period. In the meantime, shares trade at levels seen back in 1999.
The No.2 printer in the world
For all its troubles, investors note that Hewlett-Packard's (NYSE: HPQ ) printing division is a huge source of profits. Right behind HP in the global printing business is Japan's Canon (NYSE: CAJ ) , which can boast its own impressive financial profile. Free cash flow topped $5 billion in 2010 on $48 billion in sales. Few hardware-focused companies can generate free cash flow margins that exceed 10%.
To augment its position in printers and cameras, Canon has been targeting the high-end of the cinema camera market while quickly increasing presence in the medical-imaging market. The weak global economy is currently impeding growth, so sales are likely to increase less than 5% in 2011 and 2012. But make no mistake, this is another long-term winner with fortunes tied to many markets -- not just Japan. With shares hitting a 52-week low this week, it's time for a fresh look at this stock.
Risks to Consider: These Japanese companies face rising competition from rivals in other parts of Asia, so they will need to readjust their manufacturing bases and other cost inputs in order to remain competitive.
Action to Take-- > Perhaps the greatest appeal of Japanese stocks right now is the rising purchasing power of many neighboring Asian countries. Rising living standards in the region will most likely lead to higher demand for Japan's goods and services. This isn't to suggest that Japan is on the cusp of a robust economic revival, but only notes that the stocks of major Japanese companies such as the ones I mentioned above have become too cheap in light of their still-strong global footprints and could be set to rebound in a big way.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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