In his Are Japanese equities worth more dead than alive?, SocGen’s Dylan Grice conducted some research into the performance of sub-liquidation value stocks in Japan since the mid 1990s. Grice’s findings are compelling:
He argues that such stocks may offer value beyond the net current asset value:
Despite the “Japan has weak shareholder rights” cover story, management seems to be doing the right thing:
This is really extraordinary. The currency is a risk that I can’t quantify, but it warrants further investigation.
Greenbackd
http://greenbackd.com/
My Factset backtest suggests such stocks trading below liquidation value have averaged a monthly return of 1.5% since the mid 1990s, compared to -0.2% for the Topix. There is no such thing as a toxic asset, only a toxic price. It may well be that these companies have no future, that they shouldn’t be valued as going concerns and that they are worth more dead than alive. If so, they are already trading at a value lower than would be fetched in a fire sale. But what if the outlook isn’t so gloomy? If these assets aren’t actually complete duds, we could be looking at some real bargains…In the same article, Grice identifies five Graham net net stocks in Japan with market capitalizations bigger than $1B:
He argues that such stocks may offer value beyond the net current asset value:
The following chart shows the debt to shareholders equity ratios for each of the stocks highlighted as a liquidation candidate above, rebased so that the last year’s number equals 100. It’s clear that these companies have been aggressively delivering in the last decade.
Despite the “Japan has weak shareholder rights” cover story, management seems to be doing the right thing:
But as it happens, most of these companies have also been buying back stock too. So per share book values have been rising steadily throughout the appalling macro climate these companies have found themselves in. Contrary to what I expected to find, these companies that are currently priced at levels making liquidation seem the most profitable option have in fact been steadily creating shareholder wealth.
This is really extraordinary. The currency is a risk that I can’t quantify, but it warrants further investigation.
Greenbackd
http://greenbackd.com/
