The 5 Best Japanese Stocks Through The Graham Strategy
Using The Graham Strategy to syphon out the 5 most valuable stocks in the Japanese stock market
In my previous post, I announced that I will embark on a journey to find the 5 most valuable Japanese stocks through the 5 most renowned formulas known to value investor.
I think the best way to start this journey is to take the most famous formula from the father of value investing, Benjamin Graham and the Graham Strategy!
The Graham Strategy has helped value investors beat the market consistently ever since it was first presented by Benjamin Graham in the book “The Intelligent Investor” in 1949.
The Graham Strategy
As explained here, The Graham strategy is based on a company meeting as many of the seven specified criteria as possible. A company’s score is ranging from zero to seven depending on how many of the criteria the company meets in these areas:
Size - companies too small will have a low survival rate in downturns
Financial Strength
Earnings Stability
Dividend History
Earnings Growth
Moderate P/E ratio
Moderate price for Book Value (BV)
Top 5 Japanese Stocks According to the Graham Strategy
These are the 5 most valuable Japanese stocks ranked by average revenue growth over the past 7 years:
For greater insight in all the data collected to find these 5 companies, download this Excel file:
Firstly, they all have 7 out of 7 on the Graham Strategy scoring. Secondly, these companies have been vetted by my tried and true Value Vetting Strategy:
A P/E less higher than 6 but lower than 25
An average Earnings Growth higher than 7 over the past 7 years
Return on Equity at at least 10%
A dividend yield higher than 0.5%
Net debt / EBITDA lower than 2
Thirdly, I have sorted them by the highest to lowest average revenue growth over the past 7 years.
The 5 Best Companies according to the Graham Strategy:
1. Papyless
Papyless Co., Ltd. formerly known as Fuji Online Systems, is primarily engaged in providing electronic books for smart phones, tablets, and personal computers in the Japanese market.
With an average Revenue growth of 15.5% coupled with an earnings growth of 14.7% over the past 7 years, Papyless has had an incredibly fast expansion for being such a value stock.
However, the company has done exceptionally poorly in recent times, losing 52% of its stock value from just a year ago. The reasons are not obvious, but it seems to be connected to their consumer facing e-book and manga service Renta!. The Japanese e-book market has had an incredible growth over the past years, but Renta! is facing stiff competition both from Amazon and other local e-book players.
After looking at their offerings myself, I can understand why they are not doing so well. Renta!’s abomination of a website leaves a lot to be desired:
2. Takeuchi Manufacturing
Takeuchi Mfg. Co., Ltd. is Japanese heavy-machinery company that produces mini excavators, hydraulic excavators, and crawler loaders. The company has wholly owned subsidiary facilities in the United States (1979), United Kingdom (1996), France (2000) and China (2006).
The company has an impressive revenue & earnings growth of 9.7% and 7.4% over the past 7 years. This coupled with a P/E of 10.4 makes this a good candidate in any portfolio. However, the P/E ratio over the past 7 years have hovered around 10.8, so anyone hoping that the stock value to shoot up over the coming years should lower their expectations.
Takeuchi Manufacturing has a miniscule market share compared to its peers like Caterpillar and Volvo, but stable growth in the space over decades show that they are definitely here to stay. If you want to put a stock in your drawer and forget about it, this is the stock for you.
3. BR Holdings Corporation
Br. Holdings Corporation is a holding company established through the reorganization of Kyokuto Corporation. The Company operates a large real estate businesses and manages group companies. Through its subsidiaries, the company also constructs pre-stressed concrete structures such as bridges.
This is another company with an impressive revenue growth of 9.3% and an even more impressive earnings growth of 19.4% over the past 7 years (profit margins today are 5.4%).
However, there are two warning signs right of the bat:
The first is that the company is heavily invested in real estate which tends to skew their balance sheet to look better than it is with asset values mainly decided by the company itself that is often hard to verify.
The second is that the company has lost over 50% of its market value in less than a year. There are no particular news I can find that have caused this downturn, but in a bullish market like today, I’d say its a clear warning to tread carefully before putting your hard earned $$s into this company.
4. Central Automotive Products
Central Automotive Products Ltd. is a company mainly engaged in the automobile-related business with suppliers and producers of automobiles in Japan. It is involved in the development, sale, import and export of automotive parts, supplies and accessories, as well as the provision of related services.
The company seems to be a classic “under the radar” stock became of its boring place in the value chain and exclusively business facing structure. With a revenue growth of 9.3%, a earnings growth of 16.9% over the past 7 years, and a very high profit margin for being an industry-part supplier of 15.7%, its a very good value stock. However, even though its P/E is a measly 10.5, its historical P/E over the past 7 years is actually lower at 9.8. So beware that the stock might not go up much further without fundamental change in the market or interest of it.
Even if the stock does not rise much further it has a dividend yield of 2.5% annually. So, if you believe the Japanese automotive industry has a bright future, I’d say that this is definitely a stock to own.
5. Nihon Flush
Nihon Flush Ltd. is contrary to what you might think not a toilet manufacturer, but a “flush door” manufacturer that operates mainly in Japan and China.
If you’ve ever been to Japan, I am sure you’ve interacted with Nihon Flush as their doors are very iconic and prevalent in the market. One would think that their market penetration plus their revenue and earnings growth of 9.2% and 8% (profit margins today is 12.1%) over the past 7 years should give them a relatively high valuation.
However, their P/E is an incredibly low 7.2 (historical average 10.6). Perhaps their unfortunate name coupled with a downturn in the Chinese property market is to blame, but I’d say that you see a future in the Japanese and Chinese property sector, this is definitely a stock to keep your eyes on!