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'Seven Samurai' Stocks: Goldman Sachs Picks Leading Japanese Equities — How Do They Compare To The Magnificent Seven?

Published 14/03/2024, 17:28
© Reuters 'Seven Samurai' Stocks: Goldman Sachs Picks Leading Japanese Equities — How Do They Compare To The Magnificent Seven?
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Benzinga - by Stjepan Kalinic, Benzinga Staff Writer.

Japanese equities are experiencing a revival after outperforming most of their global peers for the last 18 months. This is fruitful news for investors like Warren Buffett, who placed his money in the Japanese market as early as August 2020.

After 25 years, Japan’s Nikkei 225 index hit a new all-time high. In contrast to the Nasdaq or S&P 500, this performance wasn’t a result of a handful of highly valued stocks. And, this doesn’t mean analysts don’t have favorites. Per Nikkei Asia, Goldman Sachs rounded up seven names that stood out, baptizing them as the "Seven Samurai" — in comparison to the U.S. market darlings, the Magnificent Seven.

What Are The Seven Samurai Stocks? The following companies make up the Seven Samurai stock group.

Tokyo Electron Limited (OTCPK: TOELF) Tokyo Electron Limited (TEL) is a company engaged in the manufacture and sale of electronic products for industrial uses. Its focus is on semiconductor and flat panel display (FPD) production equipment. Almost all semiconductor chips in the world go through the company’s equipment during the production process.

TEL is a vital part of the semiconductor market, so it trades similarly to semiconductor stocks at a P/E ratio of 48. The company has a net profit margin of 19.4% and an excellent balance sheet with 0 debt in almost a decade. While the company pays a dividend, it yields 1% — in line with the industry but not notable.

Mitsubishi Corporation (OTCPK: MTSUY) Mitsubishi is the largest Japanese trading company with diverse revenue streams, including petroleum production, chemicals and minerals, the food industry, power solutions and automotive and mobility products.

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Mitsubishi is among the vital Japanese conglomerates but trading at a reasonable P/E ratio of around 14x. The company has a net profit margin of 4.61%, and the management has been reducing its debt, building a strong balance sheet. The firm also pays a dividend yielding 1.5% but has a rather low 32% payout ratio, indicating sustainability and future growth potential.

Toyota Motor Corporation (NYSE:TM) Toyota is the leading automotive company and the best-selling automaker in 2023, with 11.23 million cars sold. Despite reaching multi-year highs, its stock still trades around 10 times its earnings. Furthermore, it boasts a 10.3% net profit margin, which is above the industry average.

Although Toyota has notable debt on its balance sheet, its short-term assets cover both its short-term and long-term liabilities. The recent issues with the Worker’s Union demanding the biggest yearly raise in 31 years (5.85%) could only exacerbate the debt issue. The company also pays a stable 1.9% dividend, which has been steadily increasing.

Nintendo ADR (OTCPK: NTDOY) Nintendo develops, manufactures and sells electronic home entertainment products. The company originally produced handmade hanafuda playing cards before venturing into video gaming as early as 1977. It developed best-selling TV and hand-held game consoles like NES, Nintendo 64, Game Boy, Wii and Nintendo Switch. It also owns IP to numerous major franchises, with Mario and The Legend of Zelda recognized internationally.

Nintendo trades around 19.4x its earnings and has a notable net profit margin of 29%. The company’s balance sheet is pristine, with 0 debt and over $13,5 billion in cash. The company also pays a 2.5% dividend, which is above the industry average (1.9%), but the payments have been volatile over the last decade.

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Fast Retailing Co. Ltd. (OTCPK: FRCOF) Fast Retailing is Japan’s largest apparel retailer, operating notable fashion brands, including UNIQLO, GU and Theory. It manufactures and retails clothing for men, women, children and babies, as well as offers shoes and other goods, selling through over 3,500 stores globally and online.

Its stock trades at 41.5x its earnings and its net profit margin of 11.15% is above the industry average of 7%— likely due to its size and ability to leverage the economics of scale. The firm's balance sheet looks excellent, with over $10 billion in cash and just $1.6 billion in debt. Fast Retailing also pays a 0.8% dividend, which has been growing, but it has yet to reach a notable yield.

Sony Group Corp (NYSE:SONY) Sony is a conglomerate best known for manufacturing consumer electronic products. It is one of the most recognized Japanese brands, and it has also ventured into the software, video, music and home entertainment industries.

Sony’s stock trades around 18.7x its earnings, with a net profit margin of 6.5%. The company generally kept a tidy balance sheet but took on more debt recently, mainly to finance the $3.7 billion acquisition of the gaming company Bungie. Although Sony also pays a dividend, it yields a modest 0.6%.

Mitsubishi UFJ Financial Group (NYSE:MUFG) Mitsubishi UFJ Financial Group operates as the bank holding company for MUFG Bank, Ltd. and provides various financial services in Japan and internationally. It is Japan's largest financial group and one of the largest global financial companies, with total assets of around $2.82 trillion as of December 2023.

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The stock trades around 11.7x its earnings and has a net profit margin of over 38%, which is remarkable for its size. Due to its business structure, financial institutions require a slightly different evaluation. Mitsubishi's asset-to-equity ratio is around 20x, indicating satisfactory use of debt to fund the operations.

The company has low-risk liabilities, as the majority of them come from customer deposits — which is safer than borrowing externally. Furthermore, Mitsubishi has a good loans-to-assets ratio, as outstanding loans, which are less liquid than other financial assets, come up to only 29%. Finally, the level of bad loans, which are unlikely to be repaid, is just 1.4%.

The stock also pays a stable dividend of 2.7%, which has increased over the past decade. As the payout ratio is just 29%, there is plenty of room to continue growing.

Seven Samurai Vs. The Magnificent Seven While the Magnificent Seven mostly covers the tech industry, Seven Samurai is a more diversified group, offering similar returns at lower valuations and higher yields.

In comparison to the Magnificent Seven’s average P/E ratio of around 45, Seven Samurai average around 23x their earnings, paying an average dividend of 1.5%. Furthermore, most of these Japanese companies have conservative balance sheets with significant cash reserves for dividends, buybacks or timely acquisitions.

Does Warren Buffett Invest In The Seven Samurai? Warren Buffett slowly built a position in all of the five notable Japanese trading companies. Those include Itochu, Sumitomo, Mitsui & Co, Marubeni, and one member of the Seven Samurai, Mitsubishi Corp.

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After taking an initial stake of 5% through Berkshire’s subsidiary, National Indemnity Company, Buffett now owns 9.9% in the conglomerate. Per the latest Berkshire Hathaway report, Buffett invested $10.63 billion in those five companies. By the end of 2023, that stake was worth $19.6 billion, representing an unrealized gain of 61%.

How To Invest In The Seven Samurai Outside of investing directly in Japanese stocks, a few ETFs offer good exposure to Japanese equities. Since Seven Samurai represent some of the largest Japanese companies, they are well-represented in these funds.

1. iShares MSCI Japan ETF (NYSE:EWJ) – tracks about 85% of the Japanese stock market, with four out of five top holdings coming from the Seven Samurai.

2. iShares Currency Hedged MSCI Japan (NYSE:HEWJ) – seeks to reduce the currency impact while investing in large and mid-cap Japanese equities.

3. iShares MSCI Japan Value ETF (NASDAQ:EWJV) – offers exposure to large and mid-cap Japanese equities with lower valuations based on fundamentals.

Also Read: 11 ‘Granolas’ Stocks Outperform Magnificent 7 With Lower Volatility, Higher Yields

Photo: Shutterstock

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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