Monday, June 11, 2007

A Large-Cap Relative Reversal Is Nigh

Back from a few days in the UK-countryside, and a day on the Chelskea-Prospekt (SW3 with a Thames-view), I will again express my opinion that both Sterling & London are impressively overvalued. I freely admit that Inland Revenue is far less intrusive than the Fisc in France, and London remains as pleasant as ever, but there is a price for everything, and London has indeed gone beyond the point of any reasonable ascribed premium.

But this is not my point. Today, I want to highlight the secular bottoming of the 12-month under-performance numbers of Tokyo stocks relative to the Nikkei and TOPIX indices. This figure reached all-time lows (as pointed out here) in terms of percent of stocks outperforming on a trailing 12mo basis, back at the end of CY2006. The touched the level again smack-at-the-end of the quarter (Mar07), and again smack at the end of May07. Theoretically, of course the market could narrow more, but the noisy pattern looks to me like a "classic bottom" at 25-year lows. Moreover, this coincides with extreme bearishness on the YEN, and a gaggle of pundits and observers forecasting continued underperformance of Japanese stocks.

I do not know how it will resolve itself, but resolve itself it will! Perhaps the largest caps stabilize or weaken amidst a strengthening YEN, while the balance of domestic, small and mid-cap issues rally; OR, perhaps large-caps shit-their-pants in sympathy with a global equity purge (led by futures selling/hedging) while domestics/small & mid issues give-back less or move sideways. OR perhaps everything rises, but domestics/small/mid issues simply lead the charge amidst a new round of liquidity-induced buying from oil-states-flush-with-cash, central banks, with Japanese retail mimetically caboosing. Who knows.

But my $1000/hr advice to one and all investors in Japan: accumulate domestic/small & cap value-ish, and sell those large-caps that have been so kind and munificent to you over the past two years, for the time has come.


James said...


Do you have any specific recommendations for japaneese small caps?


"Cassandra" said...

I am not about to publish a full list or portfolio, however the types of things that are interesting (to me) are Onamba(5816), Maruzen(5982), Nagase (8012), Yachiyo (7298).

Onamba makes electronic harnesses for cars, appliances, etc., is growing 8 to 10% yr, trading at book ,sound balance sheet, 9x fwd earns, 5x trailing ev/ebitda . Maruzen is the largest mfgr of commercial kitchen eqt, 90% of book, 8x fwd earns, 5x ev/ebitda, with flattish growth prospects. BOth of these mkt vals are trading 0.4x sales. Nagase is a divers chem trader/mfgr at book, with great b/s despite financing reqts of bus, 14x fwd earns, 8x ev/ebitda moderate growth and nice niche markets; Yachiyo is a Honda parts consol sub trading at book, with an ev/sales of 0.19, 10x to fwd earns, 3.5x ev/ebitda, good b/s, and reasonable growth prospects. It's traded cheaper (> 2 std's off various value regressions).

All these are cheap could be doubled if just a single large institutional shareholder takes a fancy to them, and maybe more if they raise expectations, buy back shares/or both rather than lower them.

(Warning: these are just examples of what's out there and are not recommendations to buy or sell pursuant to all legal disclaimers... juridisdictions...I may have positions....blah blah ....that this blog is for entertainment purposes only and not for yada yada yada.....)

James said...


Felix said...

Correction: Maruzen claims to be the 4th (or 3rd?) largest manufacturer in a very fragmented market.
Caution: Auto-related companies have had a very good run over the last 5 years, so there is a reason (reversion to the mean) to be more skeptical about their future growth prospects.
Agreement: There is some great value to be found among small, mid cap. stocks.