Japanese Stocks: The Greatest Value Investment of 2012?

by Justin Dove

Japanese Stocks: The Greatest Value Investment of 2012?

The investment surprise of 2012 so far isn’t the orderly Greek default, the sudden sell-off in U.S. Treasury bonds, or even the big move up in the Dow. It’s the astonishing outperformance of Japan, a market that’s even topping highflyers like China, Korea and Brazil.

The Wall Street Journal summed it up well last Thursday:

“Japan’s Nikkei Stock Average climbed above the 10,000 mark to close at its highest level in more than seven months, riding a surge in the dollar against the yen triggered by the bank of Japan’s surprise moves in February to stimulate the economy. The index has gained 19% this year, well above the 8% advance in the Dow Jones Industrial Average and the 6.7% gain in the U.K’s FTSE 100 index.”

Yet the Journal also noted “most U.S. investors have missed out on the big gains.” Not Oxford Club members, however. Chief Investment Strategist Alexander Green has been pounding the table on the Tokyo market for months now.

In a research note to members in February, Alex wrote:

“Japanese consumers and investors are flush with cash. They have largely ignored domestic stocks after decades of sub-par returns. But eventually that money will find its way out of mattresses and back into Japanese equities. When it does, the Tokyo market will lift off.

“This is doubly true when institutional money managers return to this country in a serious way. For years, global fund managers have outperformed the world benchmark simply by underweighting Japan. But let the Shinkansen leave the station without them and they will dash after it. Institutional money could hit the Japanese market like its coming out of a fire hose. When it does, you want to own what they’re buying. In short, Japanese equities are overdue for a significant rally.”

Oxford Club members know he backed up this forecast with two ETF recommendations, iShares MSCI Japan Index (NYSE: EWJ) and WisdomTree Japan Small Cap Fund (NYSE: DFJ). And then followed with a recommendation of Toyota (NYSE: TM) to Oxford Club members and to Investment U Plus subscribers in February. Both funds have pushed higher in recent weeks and Toyota has tacked on almost 20 points in less than two months.

Alex remains resolutely bullish. I recently caught up with him at the beautiful Grand Del Mar in San Diego for the 14th Annual Investment U Conference. He had this to say about the “unexpected rally in Japan” that he’s been calling for:

“This bull market in Japan is likely still in its infancy. The Bank of Japan has joined the Federal Reserve, the Bank of England and the European Central Bank in upping the level of quantitative easing. That will drive the yen lower and improve the sales and profit margins of big Japanese exporters like Toyota.

“Japanese stocks are still among the world’s cheapest. The Japanese market’s price/book ratio – the value of a company’s stock price relative to its assets – is currently 1.3. By comparison, the price/book ratio of the S&P 500 is 2.2. There is still plenty of upside here.”

Smart investors scour the globe for high-quality assets selling well below their intrinsic value. If you’re one of them, you owe it to yourself to heed this advice – add some exposure to the Japanese market today.

If history is any guide, you’ll be glad you did.

Good Investing,

Justin Dove

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Another Asian Opportunity

In today’s article, we look back at Alexander Green’s success investing in Japan at the right time.

He’s also been doing well with another Asian investment recently– Singapore-based Avago Technologies (Nasdaq: AVGO). Avago has its roots as a former division of Hewlett Packard, and its semiconductors are found in devices such as Apple’s (Nasdaq: AAPL) iPads.

Since Alex made the recommendation, Avago is up almost 10%. And he feels there’s plenty more room for the stock to grow in 2012. Here’s what he told us:

“Based in Singapore, Avago has a 50-year history of innovation dating back to its origins within Hewlett-Packard. The company was spun off in 1999, expanding into new markets with products that helped revolutionize global communications.

“In late 2005, KKR and Silver Lake Partners acquired the firm, founded Avago Technologies and completed an IPO on the Nasdaq in 2009.

“Today the company has a team of more than 2,000 design and product engineers that has launched more than 6,500 groundbreaking technologies, especially in the design, development and manufacture of semiconductor devices. Avago’s chips are used in cellphones, consumer appliances, telecom equipment, power grids, factory automation, printers, monitors, motor controls, disk drives and hundreds of consumer electronics products.

“With the economy soft, however, recent numbers have been less than outstanding. Last quarter, earnings fell 6% on a 9% increase in revenue. But the important thing is what lies ahead. I expect Avago, a prime beneficiary of the economic resurgence in Asia, to easily beat this year’s consensus estimate of $2.82 a share.

“Bear in mind, Avago is already generating annual sales of $2.34 billion. Operating margins top 25%. Management is earning an impressive 31% return on equity. The company has just $6 million in debt and $829 million in cash on hand. And you’ll earn a $1.4 dividend here, too.

“2012 should be a fine year for Avago. But I expect the December quarter was already a good one. We’ll find out for sure when the company reports results two weeks from today.”

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