Monday August 14, 3:11 pm Eastern Time
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Finding Gems in Japan's Economic Rubble
By William L. Valentine, Columnist
Valentine approves of Japan's rate hike, and spotlights three stocks that will benefit.
Editor's note: Starting this week, Valentine's column will take on a broader scope than the one-stock-a-week mandate of the ``ADR of the Week,'' as the column was known. The column has a new name, Global Insights, that will reflect its broader nature, and it will typically contain not one, but several investment ideas. We hope you enjoy it. )
Quick! What was the big event of last week? The earnings announcement by Cisco (Nasdaq:CSCO - news) or Dell (Nasdaq:DELL - news)? The benign producer prices report? Neither. I'd say it was the Bank of Japan's decision to raise interest rates.
Come again? That's right, I think the most important development for the financial markets was the Bank of Japan's decision to hike rates. While we're on the topic, allow me to showcase three interesting Japanese stocks.
Japan's rate hike is significant for several reasons.
Three Reasons to Pay Attention
First, it's important for its rarity. The BoJ has not raised interest rates in over 10 years, thanks to the economic malaise that set in about 1989. It feared that high interest rates would choke what little economic activity the country did have, and plunge it into a full-fledged Depression.
Secondly, it showed follow-through on the part of the BoJ in declaring its independence from political pressure. Prime Minister Yoshiro Mori was vocally opposed to a change from the zero-interest-rate policy, and BoJ Governor Masaru Hayami was clear in demonstrating his, shall we say, intestinal fortitude in carrying out the board's decision.
Finally, while the quarter-point move will likely have little real impact, it speaks to what many hope to be a turning-of-the-corner for an economy whose recovery I've described as ``Olympian''- it comes around every few years, but doesn't last long. The continued move away from Keynesian solutions toward supply-side tactics bodes well for a real attempt at economic growth.
In any event, several stocks in Japan look good, and all can be purchased in the US as American depositary receipts.
Canon (Nasdaq:CANNY - news):
I've owned Canon for a while and have been pleased with its progress as a stock, in spite of the broad Nikkei index's weakness in recent memory.
The best way to describe Canon is as an imaging company. It's a leader of image creation and reproduction tools. Business lines include printers (and other peripherals), copiers (it's the newly anointed leader of digital copiers in the US), camcorders, fax machines, and scanners among other unmentioned products. Oh, and let me drop the ``O'' word for spice: They have a large line of optical products for use in a variety of capacities.
I like the company for a variety of reasons. First, it's continually kept ahead of the curve in the breakneck-speed-of-change world of technology. That's probably because it plows 7% of sales back into research and development.
Secondly, it's as global as can be, deriving over 70% of sales from outside of Japan.
Finally, they're reasonably priced. Using year-end 2001 earnings, they trade at a P/E of 29 and a PEG of 1.17. For more on Canon, see my column from January 31st of this year.
Fujitsu (OTC:FJTSY - news)
Having recently profiled Fujitsu in this column, I won't repeat myself -- much.
Fujitsu does it all; I consider the stock as an all-in-one, self-contained Asian technology stock portfolio. They are largest producer of flash memory devices in the world, are the leading PC vendor in Japan, run the country's largest ISP (``@nifty''), are Japan's leading IT services vendor, and are the country's second-largest telecom equipment producer.
At current levels ($139), the ADRs trade at 63 times this year's consensus estimate, and a price/earnings-to-growth ratio of 1.8. It's still not a stock I own, but I remain a fan.
Kyocera (NYSE:KYO - news)
Kyocera is an amalgam of fast-growing businesses. Its largest division company is ceramics and related components. Ceramics are used in making integrated circuits packages (semiconductors), electronic components, fine ceramics, and consumer products. The company also makes telecommunication equipment, most notably wireless phone handsets, having purchased Qualcomm's (Nasdaq:QCOM - news) handset division. Add to this a stake in DDI, the exciting upstart telecom, and several imaging products, and you have a tasty company.
The stock is trading at 35 times newly updated 2001 consensus earnings-per-share estimates of $4.30. On top of 40% growth, you have a dirt cheap PEG of 0.9. For more on Kyocera, see my column of March 13th.
William L. Valentine, CFA, is president of Valentine Ventures LLC, (www.valentineventures.com) an investment manager of global stocks for individual investors. His weekly column, ``ADR of the Week,'' focuses on one foreign stock that trades in the US as an American Depositary Receipt (ADR). t the time of publication, the author owned shares of Canon and Kyocera stock in client accounts.
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