Tuesday January 22, 2013
by Stephen Leeb, editor The Complete Investor
We think a concerted effort to drive down the Japanese Yen will succeed, and that this success will create a powerful tailwind for the Japanese stock market.
As such, stocks that have languished for years may once again see their stars shine. Two that we would short-list are Hitachi Ltd. (HTHIY) and Sony (SNE).
Both have suffered mightily in the past decade, and both have now set the stage for a comeback with major restructuring. Such efforts should be dramatically enhanced by a lower Yen.
Sony recently entered the mobile arena with a smart phone and tablet. While growth has been relatively fast, the company’s market share is too tiny to move the needle. But Sony does have the technology to become a player, including leading imaging and power-saving transistors.
The company’s next generation of mobile devices will be introduced in 2013. Its ability to integrate smart phones with tablets and possibly even TV’s could determine whether the company can become a viable third competitor in this major market.
As one of SNE’s past problems has been a lack of integration among product lines, its offerings in 2013 could mark a major milestone.
The weak Yen should enable the company to strengthen its franchise in digital imaging, which is a major reason the company has a free cash flow yield of about 10 percent.
Large amounts of free cash, plus a book value of nearly three times the stock price and a still decent balance sheet all offer investors substantial downside protection.
On the upside, success in the mobile arena plus a big hit or two in its gaming franchise could easily double the stock in 2013.
Hitachi is Japan’s largest electronic manufacturing company. Its product lines range from large mainframe computers and memory semiconductor chips (the major chunk of revenues) to a wide variety of energy products that are used in environmental applications as well as nuclear, hydroelectric, and thermal power plants.
Approximately 45 percent of its revenues come from abroad, where a falling yen should be a major benefit. And indeed, with energy and environmental products an important part of the mix, the company should see a meaningful pick-up from China, whose currency is likely to appreciate against the dollar.
Also, Hitachi’s information business is much more dependent on infrastructure projects and large scale manufacturing than the whims of consumer preferences. Thus growth in emerging markets and continued rebuilding in Japan should boost the company’s prospects.
Like Sony, the company has been aggressively restructuring and cutting costs. In 2013 we expect margins, earnings, and cash flow to reach at least 15-year highs. Finally, the stock trades at a small discount to book value, which provides this potentially dynamic grower with downside protection.
Thus you can see how the stocks of quality Japanese companies are positioned very well to enjoy the enormous advantages of a cheaper Yen – and offer good opportunities for investors in the year ahead.
Learn more about this financial newsletter at Stephen Leeb's The Complete Investor.