Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Scott McGlashan, JO Hambro Capital Management’s Japan Fund.
Warren Buffett has never been to Japan. According to his biographer, Alice Schroeder, this may be because, at a dinner at the Washington apartment of Akio Morita (co-founder of Sony), he was so horrified by the food on offer that he swore never to eat Japanese cuisine again. However, one of his companies bought a Toshiba subsidiary in 2008 and this appears to have piqued his interest so much that he was due to make his first visit in March. Unfortunately, the Great East Japan Earthquake meant that the trip had to be cancelled. He may have missed out on one of the greatest investment opportunities of all time.
The Japanese market is undoubtedly cheap. It is in the mid- and small-cap segment that the most extraordinary value lies. At the end of June, 427 Japanese companies (over 25% of stocks in the Topix index) traded below book value, even though they were profitable and had net cash on their balance sheets. Mid- and small-cap companies accounted for 99% of these staggeringly cheap stocks, and yet many of these companies are not being followed by any analysts. Here are three of the best stocks currently being overlooked by many investors.
Toshiba Tec ( JP: 6588
) is a listed subsidiary of Toshiba. This company trades at 0.7 times book value, yet its net cash position is equivalent to 77% of its market value. Toshiba Tec makes point of sales systems and multifunction printers. It is the leading player in point of sales systems in the domestic market, but its multi-function printers are not widely used in Japan. However, for the past 11 years, Toshiba Tec has had the top market share in the Chinese market and it is also one of the top three suppliers in India. But despite its market leadership this company trades at just three times its earnings after adjusting for cash.
Many commentators claim that Japanese companies do not care about their shareholders. That may have been the case ten years ago, when shareholder registers were dominated by business partners who owned the shares for relationship purposes. In those days, takeovers were very rare. Nowadays, around 100 listed firms (again mostly mid- and small-caps) are bid for each year and company managements are very aware that cash-heavy balance sheets make them potential takeover targets.
In a recent meeting, the president of Autobacs Seven (JP: 9832), a cash-rich car accessories retailer trading below book value, was anxious that we should understand how his firm’s attitude to shareholders has changed since he was appointed in June 2008. Autobacs has raised its dividend for the past two years and will increase it again this year. The shares currently yield 4%. In May it announced that it would buy back 4% of its outstanding shares.
One of the cheapest stocks we own is a company called Oyo Corporation (JP: 9755). Oyo trades at less than 0.5 times book value and has net cash equivalent to more than 50% of its market cap. It also owns 42% of a company called Oyo Geospace, which is listed in America. Taking the value of the stake in Oyo Geospace and adding the net cash on Oyo’s balance sheet, we find that Oyo’s main business is being accorded a negative value by the market. Given that Oyo is a geological surveying company that specialises in earthquake resistance surveys and even makes equipment to locate survivors in earthquakes, this seems a remarkable anomaly.