Each week, a professional investor tells us where he’d put his money. This week: Nicholas Price, Fidelity Japanese Values.
Japan, the world’s third-largest economy, has been struggling with low growth for two decades. But this doesn’t mean there is no growth to be found. Scratch the surface and explore lesser-known parts of the equity market, and there are some promising growth stories to be found.
The best company management teams have realised that exposure to Japan’s domestic economy alone will not be enough to support future earnings, so they are looking overseas. I look for the names I think could be high-growth stocks of the future. I buy them when they are going through change, because a disconnect between their short-term outlook and their long-term fundamentals often makes them cheap.
A theme I am running is internet services and e-commerce. One stock I am playing this theme with is Kakaku.com (Tokyo: 2371). What I like about Kakaku is that it has a portfolio of different businesses. It started life as an online price-comparison site, but has moved into other areas, including online search for real estate, hotels and restaurants. It owns a strong brand called Tabelog, a restaurant review site that is highly regarded by Japanese consumers.
I expect Tabelog to be a key growth driver for Kakaku over the next two years. The return on equity of the parent company is 30%-40%, and it is a business that recycles cash flows and returns value to investors through share buybacks. As a shareholder-friendly company with excellent growth prospects, this looks to me like a compelling e-commerce idea.
Japan has experienced a surge in tourism, with visitors coming in large numbers from China and Southeast Asia in particular. Tourism will be a major theme in Japan over the next five or six years, and one of the stocks I hold to tap in to this trend is Kotobuki Spirits (Tokyo: 2222), which makes edible “omiyage”, or souvenirs.
Kotobuki has been acquiring underperforming confectionary brands and turning them around, and has been expanding in to airports. Although not very well known, I like its management team and it has great potential – not many confectionary firms are growing as rapidly as this one. Its president is dynamic and, having built a strong, popular brand in key locations, he is now focused on expansion.
Orix (Tokyo: 8591) is a diversified financial conglomerate involved in real estate and alternative power generation, but is best known as a leasing company. It’s performed quite poorly, but I still think it’s compelling. It’s priced cheaply at less than one times price-to-book value and single-digit price to earnings. It is showing good mid-term growth and a double-digit return on equity.
I don’t think the market has fully incorporated the value of its acquisition last year of a concession to manage Kansai International Airport, Japan’s second-largest airport, and other segments of its portfolio. Its long-term potential is strong and it produces a decent dividend yield.