Investing in Undervalued Greek and Japanese Multinational Companies

by Carl Delfeld

[caption id="attachment_27957" align="alignright" width="220" caption="Economic conditions in Greece and Japan have scared away many investors, leading to some promising contrarian value plays."]Investing in Greek and Japanese Multinational Companies[/caption]

You’d think that I would have a pretty complete understanding of Japan’s stock market...

After all, I studied in Tokyo for a year as an exchange student, went on to study the Japanese language for a year at Harvard, and then went back to Tokyo as a graduate research fellow at Keio University’s School of Commerce. My first two jobs in banking and institutional sales were also centered on Japan.

Still, it puzzles me why Japan’s economy and leading high-quality global stocks have been in a funk for more than two decades.

Treading water would be a polite way to put it…

Japan Lost Its Mojo

Since Japan’s banking crisis and real estate bubble burst in 1989-1990, its economy has barely grown and its market is trading at only 25% of its peak.

Japan has clearly lost its mojo, and investors are tired of trying to guess when Japan will get it back. Many have simply given up on Japanese stocks altogether.

This seems odd to me, since, as I’ve written many times, where a company is based isn’t very important. On the other hand, where a company gets its revenue and profits is most important.

Take Japan’s major companies, such as Sony (NYSE: SNE), Toyota (NYSE: TM) and Canon (NYSE: CAJ). These powerhouses get the vast majority of their revenue from outside of Japan. The same goes for Siemens (NYSE: SI) or BMW (OTC: BAMXY.PK) of Germany. Investors need to look to where these companies get their sales and profits, not where their headquarters are located.

Japanese Multinationals At Bargain Prices…

Once you realize this, the opportunities will be clear.

When, say, the Japanese market is down and out… you can move in and scoop up the best Japanese multinationals at bargain prices.

This is exactly what is happening so far in 2012.

iShares MSCI Japan Index (NYSE: EWJ)

What’s fueled this rebound in big Japanese stocks? Value.

The Nikkei was trading close to book value and smaller Japanese stocks, such as the companies within the iShares MSCI Japan Small Cap ETF (NYSE: SCJ), are still trading below book value.

So What’s Next?

Now let’s look at the more extreme situation in Greece. Russell Shorto of The New York Times summarizes the grim situation…

One quarter of all Greek businesses have gone out business since 2009. About half of those under age 25 are unemployed. Greeks pulled one-third of their money out of bank accounts and are stashing it under the mattress. The suicide rate even increased by 40% in the first half of 2011.

It’s not a pretty picture, which is why the Greek market has been pummeled, trading 90% below its 2000 highs.

You might be thinking, “I wouldn’t touch this market with a 10-foot pole.”

But the money masters think the opposite…

What they’re asking is: “What about the big Greek shipping companies not tied to the economy of Greece, but rather to global trade?”

Ah ha!

Take Diana Shipping (NYSE: DSX), the strongest of the Greek shippers. And a leader in dry bulk shipping of bulk cargoes such as iron ore, coal and grain. Diana is trading at about eight times earnings and is a major beneficiary of the rising global trade – 90% of which is transported by sea.

Diana is the best of the breed, with operating margins of 45% and a $395-million cash stockpile. The stock is trading at only 63% of book value and about eight times earnings. I also like that almost 18% of outstanding stock is held by insiders and 43% is owned by institutional investors. As usual, don’t forget to have a trailing sell stop in place.

Were not counting on it, but any Greek debt deal will send the Greek market soaring. Let’s call it an undeserved bonus.

When markets are out of favor for political or economic reasons, consider it an opportunity for a killing, rather than a red flag.

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