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In a sign that Prime Minister Abe’s stimulus policies were having their desired impact, data released on Thursday showed that Japan’s economy had expanded for the fifth successive quarter. The rise in Japan’s GDP overshadowed the improvements experienced in the U.S during the first quarter, bringing the world’s third largest economy squarely into focus.

While sluggish inflation continues to be a worry, steady gains over successive quarters suggests that Japan’s growth trajectory is stabilizing. Meanwhile, the recent pickup in consumption is likely to deal with the inflation situation in the near future, which makes this a good time to invest in stocks from Japan.

Record Stretch of GDP Gains

During the first quarter, Japan’s GDP increased by 0.5% on a quarterly basis and at a 2.2% annualized rate. Most analysts and market watchers had expected GDP to come in at 1.7%, which the figure exceeded by a significant margin. Growth also hit its fastest pace since the same period last year. Moreover, Japan’s economy has now expanded for five successive quarters.

This is the also longest stretch of gains recorded since 2005-06. During that period, the economy expanded for six successive quarters. This time around, growth was fueled by an increase in household expenditure and higher export levels. Exports increased by 8.9%, marking the third successive quarter of gains. This was a result of a rise in global demand, particularly for tech related items.

Household expenditure increased by 1.4%, primarily due to an increase in the demand for durable goods. This was the fifth successive quarterly increase for household spending, even though previous increases have been largely moderate in nature.  

Inflation Remains a Worry, Household Spending the Key

Even though the increase in GDP provided proof of steady economic improvement, Japan’s economy minister pointed out that the country was yet to overcome sluggish inflation levels. Economy minister Nobuteru Ishihara’s concerns are justified, since the economy actually contracted by 0.1% in nominal terms. Most corporations remain reluctant to raise price levels. Such a tendency persists despite the fact that a soft yen and rising fuel prices are driving up the cost of imported materials.

However, the increase in household expenditure, which contributes nearly 60% of GDP, comes as a welcome development. Such increases are crucial for Abenomics’ success going forward. Abe’s stimulus program seeks to increase wages, expenditure and prices and this chain of increases is the key to Japan’s economic success going forward.

Our Choices

Successive expansions in Japan’s GDP indicate that the country’s economy is in fine fettle. The fact that these gains have been powered by higher consumption and a rise in exports is particularly heartening, since it provides a firm basis for future gains.

Adding stocks from Japan to your portfolio makes for a smart move at this point. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Nomura Holdings, Inc. (NMR - Free Report) is a leading financial services group in Japan and has worldwide operations, providing a wide range of value-added financial services and competitive products.

Nomura Holdings has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.84, lower than the industry average of 14.90. Its earnings estimate for the current year has improved by 14.6% over the last 60 days. The stock has returned 43.3% over the last one year outperforming the Zacks Financial - Investment Bank Market sector, which has gained 30.5% over the same period.

Hitachi, Ltd. (HTHIY - Free Report) manufactures and markets a wide range of products, including computers, semiconductors, consumer products and power and industrial equipment.

Hitachi has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 24.3% for the current year. Its earnings estimate for the current year has improved by 7.7% over the last 30 days. The stock has returned 32.4% over the last one year, outperforming the Zacks Diversified Operations Market sector, which has gained 5.1% over the same period.

Tokyo Electron Limited (TOELY - Free Report) is a developer, manufacturer, distributor and seller of equipment used to produce flat panel displays.

Tokyo Electron Limited has a VGM Score of B. The company has expected earnings growth of 13.2% for the current year. Its earnings estimate for the current year has improved by 7.1% over the last 30 days. The stock has returned 95.7% over the last year, outperforming the Zacks Semiconductor - Discretes Market sector, which has gained 9.5% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sony Corporation (SNE - Free Report) designs, manufactures and sells consumer and industrial electronic equipment.

Sony has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 1.8% over the last 30 days. The stock has returned 23.6% over the last year, outperforming the Zacks Audio Video Production Market sector, which has gained 22.8% over the same period.

Alps Electric Co., Ltd. (APELY - Free Report) is primarily engaged in the manufacture and sale of electronic components and audio equipment.

Alps Electric Industries has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 33.7% for the current year. Its earnings estimate for the current year has improved by 2.8% over the last 30 days. The stock has returned 61.4% over the last year, outperforming the Zacks Computer - Peripheral Equipment Market sector, which has gained 40.3% over the same period.

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