Japan's smart money choices with great value

Buying stocks when others have lost all hope in them can be hugely profitable if sentiment turns. That’s the kind of situation Citywire Elite Companies is looking for this week among companies with heavy backing from the world’s top investors.

Lists of twenty large and twenty small caps for deep value smart money can be found at the end of this article.

How our in-depth Data Dive works

To begin our hunt for the highest-rated deep value stocks, we select the hottest fifth of large and small companies (market caps above and below $2.3 billion) with the Elite Investors we follow. All companies must also have a Citywire Elite Companies rating of AAA or AA.

How Citywire Elite Companies Works.

We then rank these stocks based on eight valuation metrics to highlight the twenty cheapest large and small caps. It should be possible to rank each stock on at least five measures. The valuation ratios we look at are:

Forecast (+12 months) price-earnings ratio

Forecast (+12 months) dividend yield

Historical shareholder return – a return based on dividends per share plus net buybacks per share

Enterprise Value (EV)-to-forecast (+12 months) sales

EV-to-forecast (+12 months) earnings before interest and taxes

Forecast (+12 months) free cash flow yield

Forecast (+12 months) price-to-book value

Forecast (+12 months) price-earnings growth ratio

Tables of 20 large and small cap high-value stocks can be found at the end of this article, organized by their low price.

The Deep Value Data Dive is one of five simple yet powerful screens we regularly perform on Citywire Elite Companies’ top-rated stocks to uncover investment ideas. We rotate through a different one of the five screens every week. They are:

Seven samurai

A notable theme from our in-depth value screen is the number of Japanese companies on our list of bargain basement stocks. There are seven in total and they all look extremely cheap.

To take Endo lighting (JP:6932), one of the two companies with the highest AAA rating out of seven.

Endo makes LED lighting for both the consumer and commercial markets. This isn’t the most exciting industry and the company’s profits are expected to fall 6% over the next 24 months, after an extremely strong recovery last year.

However, the company does have decent quality credentials, by the standards of a country with a reputation for very low corporate returns on capital. The predicted return on equity (RoE) over the next twelve months of almost 10% makes Endo one of the seven high-quality games on this benchmark.

But it’s Endo’s value credentials that stand out.

The shares are priced at just five times expected earnings, 0.4 times sales and 0.6 times book value. These lows are despite a total shareholder return (share price and dividends) of 40% over the last twelve months.

The company pays dividends, with an expected yield of 2.5%. It appears the company can afford to increase its cash yield based on the fact that it has net cash worth 16% of its JPY24 billion market cap.

Endo’s cash pile is nothing compared to that of an AA rating Hosiden (JP:6804), which makes electronic components with a focus on the telecom and automotive industries. The JPY75 billion in net cash equates to 61% of the market value.

Valuing Hosiden on an enterprise value (EV) basis, where the market value is adjusted to take into account net cash flow, means the company is worth less than three times expected earnings before interest and tax (Ebit) – eye-wateringly cheap ! Profits are also forecast to grow 10% per year over the next two years.

The largest Japanese company on the list has an AAA rating Sumitomo Mitsui Trust (JP:8309), or simply SuMi Trust. It is a holding company with 60 subsidiaries dominated by SuMi Trust Bank.

The company’s financial performance last year was overshadowed by massive hedging losses of nearly JPY300 billion, causing pre-tax profits to fall by almost two-thirds to JPY98 billion.

However, underlying business performance has been encouraging and trading is expected to continue along similar lines this year. This is reflected in the strong share price momentum, making SuMi Trust the second best performer among the seven Japanese deep value stocks over the past twelve months, with a total return of 51%.

SuMi Trust is also taking shareholder-friendly actions of the kind encouraged by Japanese authorities. This also includes the sale of strategic interests in other listed companies. It is about halfway through a three-year plan to sell JPY150 billion in shares and expects stock gains of JPY50 billion by 2024.

Investors will hope that the actions will go some way to boosting the RoE, which is expected to be just over 7% over the next twelve months.

SuMi Trust also pursues a progressive dividend policy and aims to pay out 40% or more of the available profit.

Other themes

Traditional car manufacturers, such as AAA rating Mercedes (DE:MBG) and Kia (KR: 000270), and companies that supply their sector, such as with an AAA rating Hankook Tires & Technology (KR:161390), are a notable feature of our data deep dive this month.

The sector was also a standout feature of the screen a month ago as we took a closer look at the investment case, with top investors betting on these low-cost automakers as profits soar.

A number of insurance companies also appear in the screen results, as is often the case with our deep value hunt.

Companies linked to the oil and gas sector, including AAA ratings, also feature strongly Eni (IT:ENI) and Civitas Resources (US:CIVI), which forecast an excellent dividend yield of 7% and 11% respectively. The recent weakness in stock prices reflects a decline in oil prices and sluggish natural gas prices for most of this year.

Two London-listed Georgian banks, Bank of Georgia (GB:BGEO) and TBC Bank (GB:TBCG), also present. Their share prices have fallen as a result of the country’s introduction of measures that infringe on civil liberties and are perceived as anti-Western.

We’ll be taking a closer look at some of the AAA-rated companies highlighted on screen in separate articles in the coming days: watch out for pieces on Jupiter Fund Management (NL:YUP) and Carrefour (FR:CA).