Exploring Japan Part 1
Hello Capital Light readers!
Japan has been trending among investors for over 2 years now. Japan has, for decades, been viewed as a land of value traps, where stocks were cheap, but remained so due to low or no growth, poor demographic trends, weak capital allocation (in many cases, highly value-destructive capital allocation), and a culture that prioritizes societal wellbeing over maximizing shareholder value.
However, in January 2023, the Tokyo Stock Exchange formally initiated a policy for all listed companies that any company trading for less than 1X Book Value must do one of the following, or risk being delisted:
Get their stock price above 1X P/B
Publish a detailed plan on how the company intends to raise the stock price to above 1X P/B.
Firms that do not do one of the above would risk delisting by March 2025. Sure enough, this catalyzed a series of events that resulted in many companies beginning to buy back their own stock (this is perhaps the fastest and best way for most companies to bring their multiple up to 1X book value). Suddenly, companies were jumping 30% or more when they announced a share buyback.
Many companies that were already trading well above 1X P/B have also seen their stock prices increase, as it has now become clear that corporate values would need to shift toward greater shareholder prioritization.
Although this theme has been playing out for the better part of 2 years now, I still see areas where this theme continues today. There are still cheap value stocks, and still some really interesting growth companies in Japan.
The way I see it, there are two main ways to play the Japan theme, both of which likely work well with a basket approach. The first is to own high-quality GARP names. This is my preferred approach and style. Ideally, these companies have a combination of sustainable growth, pricing power, barriers to entry, and all the other characteristics that investors love about GARP companies.
The second way to play Japan involves finding really cheap companies, ideally trading below 1X P/B, that have excess cash and/or monetizable assets that can be returned to shareholders via buybacks and/or dividends. Ideally, one finds these before any buyback/dividend policies are announced, as these often result in an immediate increase in stock price. Though many times, these companies continue to do well even after the announcement.
I’ve been following a few names in Japan for several years, but my exposure to them has been minimal. This is partially due to the requirement of minimum purchase sizes of 100 shares, which occasionally results in position sizes that are too large for a basket approach, given my limited capital base. Nonetheless, there is one Japanese company I’ve been buying recently, and I would like to add a few more over time.
Here are three names I’m currently exploring.
Let’s dive in!