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Warren Buffett Likes Japan’s Stock Market: Cheapest in 60 Years

By Jim Fink on December 16, 2011

On November 21st just before noon, a helicopter touched down at the Tungaloy metal tools factory in Iwaki City, Japan, which is located only 25 miles away from the stricken Fukushima nuclear power plant that caused Japan’s nuclear crisis last March. 

An 81-year old man – who had never been to Japan before in his entire life — stepped out of the chopper and was immediately greeted by Iwaki City’s mayor while 400 factory workers cheered him on. 

Why such VIP treatment for an old man who none of them had ever met before? When your name is Warren Buffett, the third-richest man in the world who manages $110 billion in assets, prior introductions are unnecessary even for the protocol-obsessed Japanese.

The Tungaloy plant is owned by Iscar Metalworking, an Israeli company Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) acquired 80% control of back in 2006. Buffett had originally planned to visit the Tungaloy plant back in March, but Japan’s tsunami and nuclear crisis required postponement and instead he travelled to South Korea and India, where he visited two metal tools plants owned by TaeguTec, another Iscar-owned company.

Back in March, Buffett voiced interest in buying companies not only in the two countries he was visiting — South Korea and India — but also in Japan. Specifically, Buffett said that the Japanese tsunami had created a “buying opportunity” in Japan:

Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don’t think Japan will be an exception.

It will take some time to rebuild, but it will not change the economic future of Japan. If I owned Japanese stocks, I would certainly not be selling them.

Since March, the Japanese stock market has fallen even further, making stocks there cheaper still. On his more recent trip to Japan in November, Buffett made several favorable statements suggesting that he likes the Japanese stock market best of all:

We’re looking for companies that have some kind of sustainable competitive advantage, businesses that will be around for many, many decades. There are lots of opportunities in Japan. I’m looking for things that I can put a billion dollars or more into. Japan is one of our radar screens because I like low prices, and low prices create investment value.

Japan’s Stock Market is the Cheapest in 60 Years

How cheap is Japan? The “ST Ratio” – which divides the Tokyo Stock Exchange’s TOPIX index into the S&P 500 index – hit a price level of 1.73 on November 11th, which is the highest it has been since January 1951. In other words, Japanese stocks are about as low as they will ever get. Looking at a 20-year price chart of the Nikkei (the top 225 companies of the 1700-stock TOPIX), you can see that Japanese stocks are near a well-defined bottom that has only been touched twice before during the 2002-03 and 2008-09 bear markets:

Source: Bloomberg

Although Buffett did not mention any specific Japanese stocks he would be interested in acquiring (did you expect otherwise?), I’m betting that he’s not interested in the gigantic export-driven companies like Toyota Motor (NYSE: TM) or Panasonic (NYSE: PC) that are vulnerable to a super-strong Yen and weakening consumer demand in the debt-plagued European and U.S. regions. Rather, Buffett is probably more interested in smaller-cap companies that focus more on the recovering Japanese domestic economy. As one Fidelity fund manager who focuses on Japan recently put it:

In the mid/small-cap sector, many stocks trade on single-digit earnings multiples and are returning to peak earnings. The presence of a substantial valuation gap with bigger companies suggests potential for future outperformance.

Over the past decade, small-cap Japanese stocks have outperformed large caps and many analysts see that trend continuing at least as long as economic growth in the Western world remains depressed. To get diversified exposure, two fund options are the Fidelity Japan Smaller Companies (FJSCX) and WisdomTree Japan SmallCap Dividend ETF (NYSE: DFJ).

Jim Rogers is Bullish but with a Warning

Warren Buffett is not the only value investor who is bullish on Japan. Jim Rogers recently said that Japanese stocks are “very cheap” and a great indirect play on emerging markets, but don’t overstay your welcome past three years. In the long term (i.e., 10 years), Rogers says that Japan is going to have “horrible problems” from its huge public debt load (largest among developed nations) and declining population.

Rogers’ warning nothwithstanding, three years is plenty of time to get rich investing in Japan.

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  1. avatar
    Homer 69 Reply December 21, 2011 at 12:34 PM EDT

    “When your name is Warren Buffett, the third richest man in the world….”.

    Whatever happened to the Rothschilds, the Rockefellers, the Morgans, the Warburgs, the Fairchilds, etc., etc., — did they fade into oblivion with their trillions, or are we told to keep all of that a secret? What “BS” you promulgate sometimes….

  2. avatar
    Jacques F. Bigras Reply December 19, 2011 at 1:27 PM EDT

    What ever Mr. Buffet is doing in Japan is great for him and well to do multi millionaires around, may they be American, Canadian or else. The USA should put the word out we will manufacture anything and everything any country needs at the cheapest possible way. This concept could attract a lot of potential companies that Buffet and his buddies could send to America and Canada to manufacture and put our people back to work and get the countries back in the swing of things. A lot of unemployed people could start supporting themselves again and confidence would be restored and be competitive with time down the line let alone pay more taxes.

  3. avatar
    Sam Marx Reply December 17, 2011 at 12:17 PM EDT

    Any stocks that you’d recommend selling PUTS on ?