What Worked Japan - 28 Apr 2016 - Nothing until this afternoon and then everything went to...well you know

What Worked – The only thing that mattered this week was Thursday afternoon. Yes, I will admit that we do a preliminary write-up before the close and then adjust the number as they change. Well things changed significantly today. Using preliminary number my subject line was “What Worked – Nothing.” Because up until this afternoon nothing stood out. However with the BOJ Announcement and Yen’s significant drop, things stood out.

This afternoon saw a huge sell off in high Beta, Value and 1-week momentum names. As a result, high beta names that were down were JFE down 16% on the week, 7% of that on the afternoon open, Jafco down 16%, 8% of that this afternoon.  Value names that were hurt were Hino Motors down 16%, 6% of that happened this afternoon. Mitsui OSK was down 16% this week, 7% of that on the afternoon open this afternoon.

Who Moved – There were 15 names that moved on volume this week. On the positive side, Japan Steel Works was up 10%, Coca-cola East was up 9% and Kokuyo was up 7%. On the other side, Hokuhoku Financial down 13%, Mitsubishi Motors was down 11% and CyberAgent was down 9%. All on strong volume.

Summary

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Big Differences in New OP Guidance and FY3/17 Consensus - Fanuc and Nintendo make the list

Here are the names that reported yesterday that gave new OP Guidance significantly lower than FY3/17 OP consensus estimates.

  • Ibiden’s (4062) new OP guidance is 56% below new FY1 consensus OP
  • Fanuc’s (6954) new OP guidance is 39% below new FY1 consensus OP
  • Fancl’s (4921) new OP guidance is 30% below new FY1 consensus OP
  • Nintendo’s (7974) new OP guidance is 27% below new FY1 consensus OP

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Names with still some confusion (Consensus Estimates with high Standard Deviation)

With Earnings season right upon us, we screened for names where the Street has not made up its mind. More specifically names where the standard deviation across Analyst estimates is greater than 20% of the mean estimate. I found it interesting that out of the 28 names that made the Screen, 36% did not have Company Guidance. For Example, OP consensus estimate for Mitsubishi Corp is 142,769.4 mm yen. However the Std Deviation is 46,258.4 so the OP range is from 189,028 mm to 96,511 mm yen. So it is pretty much anyone’s guess where Mitsubishi will come in at…. JX Holdings is even worse with a OP consensus range from positive 41,485 to negative 168,451 mm yen.

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What Worked Japan - 22 Apr 2016 - Value continued to do well but was not supported by Volume

What Worked – Basically everything that worked last week continued to work this week but to a slightly lesser degree. Value continued to be very strong with PBR leading the way. However PBR went from an incredibly strong information coefficient (IC) of 43% to just a very strong 30% IC. PBR has not worked two weeks in a row since last August. Low PBR names that did well this week are Idemitsu Kosa up 15%, Nippon Sheet Glass up 11% and Mitsui Mining and Smelting up 9%.  Names that were up over the last week continued to run this week.

Beta also continued to do well this week. As with Value it has been a long time since Beta has worked two weeks in a row. High Beta names that did well were Nippon Paint Holdings was up 15%, Kubota Corp was up 12% and Asics Corp was up 10%. We also saw a continued selloff in names with a high % of Retail Investors. Mitsubishi Motors was down 40%, GS Yuasa was down 11% and Kaken Pharma was down 9%.

Who Moved – However, as with last week Volume is not driving the market. Only 10 names moved on volume this week. On the positive side, Idemitsu Kosa was up 15%, Showa Shell Sekiyu was up 13% and Penta-Ocean Construction was up 6%. On the other side, Mitsubishi Motors was down 40%, KONAMI was down 6% and Yaskawa Electric was down 4%. All on strong volume.

Summary

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Size Matters - Insider Ownership impact on Japanese Stocks

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Higher ownership by management removes socialist salaryman thinking

Is it any surprise that companies tend to perform better when board members (insiders) have a higher proportion of their remuneration linked to stock performance? Shareholders have traditionally been well down the list of priorities of Japanese companies, much to the chagrin of foreign investors. Stock incentives, especially in larger corporations, are often a miniscule part of total compensation for leaders. So much so that there is little incentive to focus on chasing real returns through more aggressive strategy. Many leaders in Japan would prefer to see out their tenure as CEO without blemish or scandal to avoid the risk of failure and the shame it would inevitably bring. 

In hindsight looking at Sharp’s (6753) desperate long term need for crisis management could we have honestly expected any substantial restructuring when the CEO has $33,000 in stock despite being at the company 36 years? Had Sharp’s board held more skin in the game they might have defended shareholders much better against Terry Gou’s constant renegotiations. Perhaps if Sharp had learnt from Carlos Ghosn style performance based compensation structures, they might have been able to defend their turf from Gou. As it stands now Sharp are mere whipping boys of Hon Hai and they’ll be dealt the wrong end of the Tarot cards and have no power to prevent it.

It also begs the question - do we really even need the rigid adoption of a Corporate Governance Code that encourages a minimum of two independent directors when the real way to drive shareholder returns (as we will discover) seems to be to dangle the carrot of stock options and higher insider ownership to achieve these targets? We have argued that Toshiba having a majority of independent directors will do virtually nothing to resurrect fortunes.

While there is no exact science around the right number what we can deduce is that on 1, 5 and 10 year time frames insider ownership under 1% shows consistently poorer returns than those above. The data speak for themselves. 

To those that worry about boards recklessly chasing short term targets there is no reason to suggest that long term targets are pushed by remuneration committees with clawbacks on failure.

Insiders seem to have a large bearing on share price performance, clearly providing a platform of engagement with the company’s fortunes and seemingly much more effective than just hiring two independent directors.

Enjoy the weekend.

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What Worked Japan - 15 Apr 2016 - Value bounced hard this week but was not supported by strong Volume

What Worked – After approx. 5 weeks of underperformance, low PBR and FY1 PE names bounced hard this week. The last time Value names did this well was in October 2015. After the October bounce, Value outperformed for the next month or so. However, after the most recent Value Bounce, Value immediately went back to underperforming. So not sure if this is signal in change or just a 1-week anomaly. Low PBR names that moved the most were Kobe Steel up 16%, Mitsui OSK up 16% and NTN Corp up 15%.

As with Value, Beta dominated this week as well. This was the best week for Beta in the last 2 years. High Beta names that did well were Hitachi Metals up 15%, Nippon Steel & Sumitomo Metal up 15% and Fukuoka Financial up 15%. 12-Month momentum came in with an incredible negative 57% Information Coefficient.  Names that were down over the last year that bounced up the most were Kobe Steel up 16%, Minebea up 16% and JFE Holdings up 14%. Growth suffered at the hands of Value. Growth names that were hurt this week were Tsuruha Holdings down 1% and Temp Holdings down 2%.

Who Moved – Unfortunately as with most of the recent bounces, this week’s bounce was not based on volume. Only 16 names bounced on Volume this week. On the positive side, DMG Mori was up 16%, Komeri was up 14% and Kawasaki Heavy Industries was up 12%. On the other side, Izumi was down 5%, Shimachu was down 4% and ITO EN was down 3%.

Summary

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What will soon to be FY1 EPS numbers mean

With Year-end Earnings season nearing, we are about to see all the new Guidance and FY1 forecasts. As we have previously shown, Analysts do not really worry about FY2 until it becomes FY1. So we went out and calculated an EPS number based on the 10-year historical median PE. This gives a kind of baseline to compare with the new FY1 estimates. For example, Sankyo’s (6417) current FY2 EPS forecast ¥145, however the 10Y median PE based EPS is ¥309. As you can see in the chart below, the median PE based EPS is significantly higher than any EPS forecast since 2012. If Sankyo’s PE is to move back in line with historical numbers, either EPS has to go up a lot or Price has to give more. 

In the attached files, we have the historical charts with the TOPIX500 universe and then also a screen comparing the PE EPS with current FY2 forecasts with both positive and negative results. For example, TDK’s median PE based EPS is just ¥355 compared to the current FY2 EPS is at ¥1,331. TDK’s current FY2 PE is at 4.5x while its historical median PE is 17x. Maybe the new FY1 estimates will be lower than the current FY2, but there still looks to be good room for expansion.

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What Worked Japan - 08 Apr 2016 - Value / Beta were hurt again and Retail names continue to do well

What Worked Despite TOPIX down just 1%, Value was destroyed. FY1 PE came in with a negative 35% IC. While PE really has not worked since the end of February it has only done this poorly once in the last 2 years. Nachi-Fujikoshi was down 12%, Daicel Corp was down 10% and Fuji Heavy Industries was down 9%. High Beta also names took a good hit this week. Along with the Value factors, Beta has not really done well since February and those were just sporadic bounces. Beta has not consistently done well since last October. This week NTN Corp was down 9%, Mazda was down 8% and Toyota Boshoku was down 9%.

Momentum continued to work, but this is negative momentum. Names down over the last year continued to go down. Mitsui Engineering & Shipbuilding was down 8% and IHI Corp was down 8%. Names with a high % of Retail Investors and OP growth names seem to be the only names that did well this week. Retail names have pretty much consistently worked since the end of last year. Cosmo Energy was up 11%, Sumitomo Dainippon Pharma was up 9% and Maruha Nichiro was up 13%.

Who Moved – Not a lot of names moved on volume this week. Only 13 names had volume more than 1 standard deviation above the mean this week.  On the positive side, Kewpie Corp was up 16%, Toyobo was up 13% and Azbil Corp was up 5%. On the other side, Nachi-Fujikoshi was down 12%, Toyota Boshoku was down 9% and Hokuhoku Financial was down 4%..

Summary

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Strategic market cap size or strategic market capsize

Listing badly using the same old broken water pumps to salvage a lost cause

A funny thing happened the other day on Facebook. A buy-sider was lamenting that the sell-side brokers don’t invite her out anymore. I joked to her that a sell-sider’s real worth now is measured by the lonely underperforming buy-sider inviting him/her to lunch and paying for it PA. While there is some tongue in cheek with the above there is no doubt that the financial services industry has almost always been ‘fair-weathered’ and self-serving. As the old adage goes, “when you have everything your friends know who you are. When you have nothing you know who your friends are.”

We have no intention to sugar coat realities to placate the hundreds of egos that may crumble under the weight of the bleeding obvious herein

The chart below shows the bias of the percentage of buy ratings on the sell-side versus the direction of Topix. What we see is some eerie similarity with the action pre GFC. The bias of positive ratings stood at around 48.5% in early 2008 however the market reaction was generally negative. Rolling 8 years forward we see a very similar trend emerging. As of April 2nd, 2016 we see that the percentage of buy ratings is at 47.6% with Topix behaving much like 2008.  

Fig. 6 : Topix Price versus % of Buy Recommendations on the sell side

Source: Custom Products Research

If one buys into the idea that the sharp selloff post Lehman Shock could occur again do we see Topix back with a 700 handle with a three-year sideways move? After we survived the GFC the sell-side was overwhelmingly positive on the basis of stocks bottoming. However the impact on share prices was negligible. Only when buy ratings had bottomed out, one presumes on capitulation, did the market rally again. So perhaps sell-side analyst capitulation will be the signal to buy the market but watch for the 48.5% bias level.

So has large cap coverage bias helped with performance?

The short answer is no. Looking at 1 year and 5 year total returns clustered by analyst coverage we see that the under-covered (zero to four analysts) trumped the 5-9, 10-14, 15-19 and 20+ analyst segments in a study of 1,000 stocks, Fig. 3.

Performance of 1,000 stocks grouped by the amount of analyst coverage

Source: Custom Products Research

Put another way, the 57 stocks with an average of ¥2.56 trillion market cap in the 15-20 analyst band had the worst performance and the 604 stocks with an average market cap of ¥136bn (coverage 0-4 analysts) performed best and was the only cohort that saw positive territory in both periods.

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What Worked Japan - 01 Apr 2016 - Value really has not worked for the last month

What Worked With TOPIX down almost 5%, Value took another hit this week. Dividend Yield and PBR were hurt the most. High Dividend Yield names have not done this poorly in the last two years. Div Yield names that were hurt this week were Anritsu Corp down 13%, Okasan Securities down 11% and Dowa Holding down 11%. Low PBR names that took a hit this week were Rohm down 9%, Citizen down 9% and Yokohama Rubber down 9%. High ROE names continued to well. High ROE name have done well over the last month.

However with only 33 names up in TOPIX 500 doing well is a relative term. Konami Holdings was up 9%, CyberAgent was up 5% and SCREEN Holdings was up 5%. Names that were down over the last month continued to go down this week. Alps Electric was down 11%, Nippon Express was down 12% and Panasonic was down 10%. We also saw a selloff in names with a high Beta names this week.

Who Moved The good news is that while TOPIX was down 5%, it did not move down on volume. Only 12 names move on volume this week. Unfortunately, there wasn’t a positive side. However on the negative side, Ajinomoto was down 11%, Zensho Holdings was down 9% and Sony Financial was down 10%.

Summary

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