3 Ways to Invest in Japan’s Recovery

In January, I declared that Japanese companies had the most undervalued stocks in the world. A calamitous magnitude 9.0 earthquake and subsequent tsunami have inflicted severe damage on the eastern part of the country, the most disastrous of which has been severe and potentially permanent damage to the Fukushima Daiichi nuclear power plant.

The events are being closely tracked by the international community, and the latest information details that thousands may have lost their lives and as many as a half million citizens have had their homes destroyed. Conditions at the nuclear plant remain dire and the crisis has recently been raised a level to 5 on the International Nuclear Event Scale (INES). The latest talk is to bury the most damaged reactors in sand or concrete, but hope remains of restoring power so that temperature levels can be lowered to restore some stability to the plant.

In my last article, I pointed out that the Japanese stock market had fallen to valuation levels only seen a couple of times since its market peaked. I called it one of the most appealing stock markets in Asia — and in the world. As the chart below shows, the latest tragic series of events has served to knock about 12% off the Japanese market’s value and pushed it into even more undervalued territory.


Of the four stocks I profiled back in January, two are below levels I found to be compelling entry points at the time. Here is an update on each of them and why they remain great picks.

1. Fast Retailing (PINK:FRCOY)
Business: Retail
Year-to-date return: -25%

Fast Retailing has a reputation for selling fashionable clothing at very low prices and therefore appeals to a vast market of cost-conscious consumers. As I mentioned previously, it is an undisputed growth company that is blanketing the world with its popular UNIQLO stores. The company operates about 862 UNIQLO stores, along with a number of other retail concepts, including the Theory clothing brand in Japan and the United States (306 stores) and the CABIN brand (205 stores), which competes on a global scale with stores throughout the United States, Europe and Asia. It has ambitious plans to open more than 1,000 stores in China in the next decade and plans to grow into one of the largest apparel retailers on the planet.

The stock has fallen as the near-term outlook in Japan has become clouded. Rightly so, those affected by the disasters are focusing on the most basic of necessities, including food, water and medical supplies. Obviously, fashion is not at the forefront for the time being, but growth overseas remains stable and Japan will return to more normal levels within 12-18 months. The current P/E has remained at about 21 as earnings estimates have been trimmed along with the lower sales forecasts in its home market, but sales and profits should see a jump within two years and have very sustainable growth prospects.

2. Nippon Telephone and Telegraph (NYSE: NTT)
Business: Telecom
Year-to-date return: -2%

Back in January, I stated that there is downside protection in shares of Nippon Telephone and Telegraph, given it dominates the Japanese market for telecom services. The stock is only off a couple of percent for all of 2011, which is impressive, given the circumstances. The company controls about half of the Japanese telecom market, and though sales growth has been modest in recent years, profits have grown steadily at more than 7% each year in the past decade. Weak core growth has been easily supplemented from its wireless subsidiary NTT DoCoMo (NYSE: DCM), of which NTT owns 57%. [I recommended DoCoMo for more growth-oriented investors in my previous article and, so far, the stock is up close to 5% this year.]

I also stated that investing in NTT is similar to investing in AT&T (NYSE: T) or Verizon (NYSE: VZ) stateside. The firm’s stated dividend yield is a bit more modest at just over 3%, but the price-to-earnings (P/E) ratio is very modest at less than 10, which means it doesn’t have to grow much to earn returns for shareholders. Earnings could continue to improve from cost-cutting measures and through the DoCoMo ownership stake.
3. A general bet on Japan Inc. is even more compelling
Betting on Japan overall remains a viable strategy and one of the best ways to profit from the fact current events have knocked the market down about 12%. Japan has many large firms that successfully compete on a global scale. The MSCI Japan Index Fund (NYSE: EWJ) remains a great passive approach, as it provides a low-fee way to gain exposure to Japan’s leading companies. Fidelity also offers a number of actively-managed options, including Fidelity Japan (Nasdaq: FJPNX) and Fidelity Japan Smaller Companies (Nasdaq: FJSCX). Both are firmly ahead of their benchmarks during the past five years but are down about 7% so far in 2011 and may represent a good entry point for new investors.
Action to Take —> Japan is offering some of the most appealing valuations in stocks seen in the past 20 years. And that was before these tragic events occurred. Now, I consider Japanese stocks to be in extremely oversold territory. [Be sure to read my original case for Japanese stocks.]

Though it will take Japan time to recover, it brings the opportunity to rebuild and an ideal chance to kick-start the economy to rebound from multi-year struggles. The rebuilding efforts and eventual recovery in investor sentiment offer both short-term and long-term upside potential for savvy investors.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…