Why Berkshire Hathaway Found Value in Japan - August 2020
Berkshire Hathaway (BRK/A, BRK/B) Chairman and CEO, Warren Buffett, bought about $6 billion of Japanese stocks for his 90th birthday which was Sunday. Berkshire Hathaway announced this morning that their wholly-owned insurance subsidiary had acquired about 5% of five Japanese trading companies: Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. Ltd. And Sumitomo Corp. Buffett indicated that these were intended to be long-term holdings and Berkshire may increase its stake to up to 9.9%. Full disclosure: I am a long-time shareholder of Berkshire Hathaway and worked for Salomon Brothers when Warren Buffett became Chairman and CEO.
In a note in late July we suggested that investors consider Japanese stocks because they looked inexpensive relative to other global stocks in our opinion. The valuation remained attractive even when adjusting for country sector differences.
Japanese stocks remain inexpensive across a host of measures including 12-month forward estimated: price-to-earnings (P/E), price-to-sales (P/S), enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA), price-to-book (P/B) and dividend yield. A portfolio of equal weighted holdings of Berkshire’s new Japanese stocks (Berkshire Japan Holdings Avg.) is the cheapest across four out of five of the valuation metrics illustrated (Chart 1).
The valuation characteristics of each of the individual holdings is shown in Chart 2. Sumitomo Corp. is clearly the outlier in terms of earnings relative to price, but scores among the cheapest according to the other measures.
Japanese companies weathered many years of slow domestic growth so they are typically managed with a conservative capital structure and the average current ratio of Berkshire’s holdings better than the MSCI Japan index. Japan’s domestic economy has been very weak, but Japan’s companies are very exposed to global growth so a global recovery could be the catalyst for the stocks.