The 8 Most Undervalued Stocks in Japan, and the World(?!)

Through a value and growth investing framework, I have found the shiniest golden nuggets in the Japanese stock market

Without forcing you, my very first readers, to scroll through a long winded biography of who I am and how I became so interested in Japanese stocks, I will go straight to the punch!

Without further ado, here are the 8 most undervalued stocks in Japan with the most important key numbers:

1. Sankyo Frontier

2. Itochu

3. Dai-ichi Cutter Kogyo KK

4. Arcland Service Holdings

5. Cotta Co

6. Nomura Micro Science

7. Akatsuki Inc

8. Nintendo

First, these filters were used to find all golden nuggets in the main Japanese stock exchanges:

• A P/E lower than 25

• Average Annual Revenue Growth >7% over 7 years

• Average Annual Earnings Growth >7% over 7 years

• Average Return On Equity (ROE) >10% over 7 years

• Dividend >0.5%

• Net-Debt <2

Even with these stringent filters in such a bull-market, I managed to find 175 Companies on the main Japanese stock exchanges. I guess it really shows how undervalued it is!

Of those, I sorted out the 8 most attractive stocks based on more subjective values, such as:

• Intentions to expand abroad

• Quality of website

• Quality on annual reports

• Statements from their CEO

• “Sexiness” and non-convoluted sectors - So oil & gas, traditional banking, biotech etc. is out of the list.

(Sadly, the very financially attractive company Daiho did not make the cut because of its website)

Here are my justification and notations for each of the most undervalued stocks in Japan:

Sankyo Frontier

Designer and builder of modular homes, offices, event-spaces, and even restaurants, its has become one of the biggest producers in its relatively niche market. This might sound like a novel concept, but Sankyo has had an average revenue growth of 7.6% and an average earnings growth of 14.6% over the past 7 years! On top of that, its P/E ratio is only 10.4! A company with this growth and a revolutionary, environmentally friendly approach to construction would easily be valued double in the US market!

Itochu Corp

A behemoth conglomerate that owns huge chunks of companies like Converse, Family Mart and LeSportsac. Ever since the Japanese bubble burst in the early 90s, these conglomerates have been branded as unfashionable inefficient value destroyers. Hence, they are usually valued way lower than the sum of their parts. With an insanely valuable portfolio and a P/E of only 8.5 despite an average yearly revenue growth of 10% over the past 7 years, only a fool would disagree. With legends like Warren Buffet jumping in to buy up loads of these conglomerates’ shares, its safe to say that buying now, when they are still this cheap, is a great opportunity.

Dai-Ichi Cutter Kogyo KK

A diamond cutting tools company that has found a very lukrative niche in the construction market. This company is may not in the sexiest industry, but with an average growth of 10.2% and an average earnings growth of 16.5% over the past 7 years, it sure produces a sexy level of return on capital (32.4%)

Arcland Service Holdings

This is a really interesting restaurant conglomerate. Compared to its Japanese peers, Ootoya or Yoshinoya, it owns lesser-known Japanese chains like Mango Tree and Katsuya. However, the company’s profit margins are up to 2000% higher. (around 8-10% vs. 0.5-0.8%). This helps the company have a relatively sane P/E of 17.4 compared to Ootoya’s P/E of 110 and Yoshinoya’s P/E of 113, so if you want exposure to the Japanese restaurant industry, this might be your best bet.

Cotta Co

Japan is world-renouned for astonishing packaging so it would be a crime not to find an undervalued Japanese packaging company. Cotta Co sells material and packaging for confectionary. Even though it has a low profit margin of 3.3% ,its average revenue growth is 12.5% and average earnings growth a whopping 26% over the past 7 years.

Nomura Micro Science

Nomura Micro Science specializes in water purification technologies and chemicals. A company that has seen a stable revenue growth of 14.8% and managed to hold a earnings growth to 25.7% over the past 7 years. What makes this company so interesting is that it could easily become a strong ESG contender, and with today’s P/E standing at 14, its valuation could climb very fast.

Akatsuki Inc

This is a Japanese mobile game developer that has made hits like a Mari Kondo game (KonMari Spark Joy in Japan) and several mobile exclusive Dragonball Z titles. Despite having typical margins for software companies of 18% and an average revenue growth of 30% over the past 7 years, it still has a low P/E of 15. This feels like a classic case of a super well-run company that has a low valuation because Japanese investors don’t have the same appetite for software companies as the US. Hopefully that will change, and if it does this is a clear candidate for a gigantic stock rise!

(Who doesn’t want a cute Marie Kondo doll to spark some joy into your phone)

Nintendo

I saved the best for last! Who would have thought that one of the best known companies in gaming is undervalued?! Turns out that the company’s P/E as of today is a measly 12!

True, profits are record high, possibly with tailwinds from the ongoing pandemic, but with an average P/E of 45 over the past 7 year, the potential is seemingly astronomical. If Nintendo doesn’t do something truly disastrous in the coming quarters, I’d say its a clear buy!

If you think this article was a delight and want to read more, I would gladly continue writing on topics like

• “How you can invest cheaply in Japanese stocks”

• “Why the Japanese market isn’t decreasing like its population”

• “How to understand Japanese annual reports”

and of course, more interesting stock-picks!