Finding the rare gems of Japan’s corporate sector
Japan was known for decades to be a hunting ground for deep value stocks, meaning the companies were valued below their net liquidation value and here we are not talking about book value, but below the net-working capital position. This was the old classic Benjamin Graham, the mentor of a young Warren Buffett, yardstick for value, but has since disappeared because understanding of equity valuation has removed such rare deep value stocks. These opportunities only existed in the post 1929 crash market because investors were simply scared of stocks.
Fast forward to Japan in 2023 and investors can still go on deep value hunting, but this segment is what Warren Buffett would call looking for cigar boxes with maybe one last cigar puff. In general we would argue that it is more interesting to hunt for high quality companies and a good way to start is to isolate companies with a high return on invested capital as that is typically a signal of a strong business model and product.
The list below shows 14 Japanese companies with a ROIC above 20% and a market value above $5bn. One observation is that this group of companies is quite small given the size of Japan’s equity market but it underscores Japan’s long tradition for maintaining corporate intra-holding relationships and employment more than effectively using capital. However, as we highlighted in our recent notes the Japanese corporate sector is changing and has become much more efficient in its use of capital. For many foreign investors there will not be many recognizable names except maybe for Nintendo which is a household name in many countries due to its iconic gaming consoles.