That stocks are cheap in Japan is no secret. Part of the reason is probably that it’s hard to get exited about a stock market that has been going down for decades. Even though 2013 was a pretty decent year for the Nikkei 225 the index is currently trading at the same level as in 1986. But the bigger issue is that corporate governance is a major problem in Japan, and it’s also the reason why I have never been too enthusiastic about jumping on the Japan bandwagon. As someone mentioned on Twitter this week:
If something is undervalued for good reason, then it isn’t undervalued.
— Hardcore Value (@HardcoreValue) 7 augustus 2014
This is certainly true to some extent in Japan. It’s not a coincidence that a majority of Japanese companies have a very large cash balance: it’s the result of a country wide culture of poor capital allocation. So buying cash at a discount with a small operating business attached never sounded very attractive to me. You should expect that the company continues to sit on the cash balance for years or even decades while earning shareholders almost nothing in the mean time. I expect that eventually corporate capital allocation will improve in Japan, but that could be an event that happens outside my investment horizon.
Luckily not every company in Japan is a stagnant business with poor returns on equity, and some are just too cheap to ignore. I will let the table below do the talking:
As is visible both companies managed to generate good returns on equity the past 5 years despite the drag of a medium/large cash balance. I expect that these companies will be able to grow intrinsic value meaningfully in the years to come, and hopefully that will be reflected in the stock price and/or higher dividends. Fujimak has a good history of growing it’s dividend while it has also been investing a lot of money in capex the past years. Normally I would be a bit worried when I see a lot capex, but in the case of a Japanese company I actually think it’s a pretty good sign: almost anything is better than idle cash…
Since both companies are located in Japan and I don’t speak a word Japanese my analysis of both companies is superficial at best and purely based on the financial statements of the past 5 years. It is totally possible I’m missing something important. That’s why I initiated two small positions, and I might add a couple of other names in the future to create a small basket of similar priced Japanese stocks to diversify my risk.
Author is long Fujimak and Nansin