These Japanese companies are making smart buyback decisions
This article mirrors the online version of our weekly FREE Best Ideas Newsletter distributed on 23.05.2023. Register here to receive it in your mailbox every Tuesday.
Notwithstanding the Japanese market's rise of 14.7% over the last year, we persist in locating appealing investments within it.
Challenges in Appraising Japanese Corporations
When delving into opportunities, a prevalent difficulty arises in evaluating Japanese corporations. This dilemma stems predominantly from the ample reserves of cash these entities hold. Consequently, when employing the enterprise value metric, their value appears remarkably low.
A quick reminder: enterprise value is derived from market value plus debt minus cash.
Due to the substantial cash reserves, the enterprise value becomes exceptionally low, rendering these companies highly economical even with a modest profit margin.
The crux of the issue lies in these companies' inaction regarding their cash hoard. Therefore, investing in them represents a stagnant endeavor.
Shifts Unfolding in Japan
Nevertheless, recent developments have compelled Japanese corporations to re-evaluate their substantial cash holdings.
Primarily, activist investors have intensified their scrutiny of Japan, yielding surprisingly favorable outcomes.
Secondly, following years of deflation, inflation has materialized in Japan. This has diminished the allure of retaining substantial reserves as their value depreciates annually, unlike in a deflationary milieu.
Commencement of Buybacks
Subsequently, Japanese companies have commenced repurchasing their stock, presenting opportunities for investment.
Japanese Companies Implementing Astute Buybacks
It's not always advisable to engage in stock buybacks. However, for undervalued companies holding significant cash reserves and facing a dearth of promising investments, this tactic holds merit.
For additional insights, refer to the article: How to uncover corporations executing astute stock buybacks.
New Investment Opportunities
To pinpoint Japanese corporations executing prudent stock buybacks, I've curated a screening tool to assist you.
This is how the screening tool operates:
- Select Japan from the country roster
- Choose the top 20% in terms of buyback yield
- Opt for financial statements updated within the last six months
Subsequently, I incorporated the following criteria into the screening results:
- Buyback percentage
- Qi Value – Valuation measure
- Value composite Two – Valuation measure
- Price to earnings – A valuation ratio that doesn't incorporate enterprise value
Screening Outcomes – Investment Prospects
The ensuing are the outcomes yielded by the screening process.
Arranged by buyback yield
Below is a sorted roster of outcomes based on buyback yield, from highest to lowest.
As observed, the findings are intriguing, with certain companies repurchasing over a third of their shares in the past year!
However, these results lack indications of whether these corporations are undervalued and thereby executing prudent buyback decisions.
Let's review the outcomes utilizing valuation metrics.
Arranged by Qi value
We formulated the Qi value composite valuation measure based on extensive testing of premier ratios and indicators.
For further details on Qi Value, peruse this resource: This investment strategy is yielding even more beneficial outcomes than anticipated – Qi Value.
It's improbable how buyback yields dwindle when incorporating a valuation ratio. It appears that few undervalued corporations are repurchasing their stock.
Arranged by Value Composite Two
Value Composite Two, conceived by James O'Shaughnessy, is an exceptional valuation ratio. Gain insight into it here: Enhancing your portfolio with a global strategy to adopt the Value Composite Two.
Additional gripping findings displaying numerous corporations repurchasing substantial volumes of stock.
This is likely attributed to Value Composite Two encapsulating the price to book ratio (absent in Qi Value).
Arranged by price to earnings ratio
Subsequently, I arranged the roster by the price to earnings ratio, yielding compelling outcomes.
Many corporations exhibit excessively low PE ratios (almost unbelievable) while repurchasing substantial quantities of stock!
Undoubtedly, several engaging investment opportunities are present in this roster.
Recap and Inference
Hopefully, this roster has offered you intriguing investment concepts to explore.
Japan presents itself as a considerably undervalued market undergoing compelling transformations, thereby yielding fascinating investment prospects deserving of exploration from the aforementioned rosters.
Here's the link to the aforementioned buyback article: How to identify enterprises executing prudent stock buybacks
Your analyst, aiding in identifying superior investment concepts
PS To presently identify enterprises executing exceptional stock buyback decisions, click here.
PPS It's effortless to become distracted; why not enroll now before losing focus?
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