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Taking Stock

Japan’s Tragedies and the Market

The tragic earthquake damage in Japan continues to dominate the news. While this has an impact on our stock investments, the higher priority is to assist with the human needs. The market has been good to us over the past couple of years and I recommend donations to https://american.redcross.org/site/Donation2?idb=0&5052.donation=form1&df_id=5052

The Japanese economy and stock market have been in the doldrums for years even before these calamities struck. Much of their current stagnation traces back to the collapse of Japan’s overheated stock and real estate markets in the 1990’s. Unlike the recent global financial crisis, the Japanese bubble collapsed gradually, a time sometimes called “the lost decade.”

Severe earthquakes struck Japan near Kyoto in 1996, precipitating a stock market slide in the Tokyo market. Unlike current conditions, those events hit an inflated market that at that time accounted for 30% of the world’s total stock market capitalization with its stocks sporting a hefty price: earnings of 52. Currently, Japanese stocks account for 7.5% of global stock market value and have a P/E of 15.

Japanese stocks are thus now trading at historically reasonable valuations. Their prices are back to the levels of last November, when they began a 19% rally. Some analysts, myself included, believe this disaster may be the catalyst needed to jumpstart the Japanese economy, which has been mired in a deflationary spiral for years.

With the U.S. stock market already in a correction and major uncertainties persisting in the Middle East, I feel new buys should be made cautiously, however, one Japanese stock seems to have compelling reasons to justify initial purchases now.

This is Kubota (KUB-$44) a maker of farm equipment, construction machinery and various pipe-related products often referred to as “Japan’s Caterpillar.’ Sales are $12 billion, flat recently, but undoubtedly headed for record numbers as Japan rebuilds. Earnings for the fiscal year ending in March are currently forecast at $2.60, up 45%. New problems will pressure current earnings but the company seems headed for record results over the next few years.

Japan is an organized country with a resilient people who rebuilt after World War II their ravaged country into the world’s number two economic power. In comparison to European countries, it received negligible foreign assistance. With global assistance now gearing up, its economy is positioned to regain momentum.

If the signs of resumed growth appear, appealing stocks would include Kyocera (KYO-$92), Hitachi (HIT-$51) and Mitsubishi Financial Group (MTU-$5). All three of these, as well as Kubota, pay modest dividends, perhaps a signal to shareholders of traditional Japanese hospitality.

The threat of radiation leakage in Japan following failures of conventional water cooling systems prompted the usual misplaced public hysteria in the U.S. that continues to hold back the growth of nuclear power. Last year, a single coal mining accident in West Virginia killed 29 miners and the BP oil spill killed 11 workers and countless wildlife. I doubt that radiation related deaths in Japan will approach either figure but global efforts to shift toward less toxic and less import dependent fuels suffered another setback.

Cameco (CCJ-$28), the world’s largest publicly traded uranium miner, was trading just at $44 only a month ago and is now at a six-month low on emotional selling. Demand from China and from existing plants will sustain sales and patient investors will enjoy a modest yield augmented by annual increases. Even GE (GE-$19), which has minor nuclear exposure, backed off. It remains a buy as a diversified and growing company with a reassuring total of $150 billion in sales and a 3% yield.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. (949)-494-1376/(800)-697-2622; www.crowellroberts.com

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