Making sense of Warren Buffet’s latest Japan picks

Written by: Jayson Derrick
September 1, 2020
  • Billionaire investing legend Warren Buffett bought a 5% position in five different Japanese companies.
  • He didn't take advantage of falling U.S. stock prices in March.
  • Buffett was attracted to the discounted valuation, healthy dividend, and lower risk stocks.

Billionaire investing legend Warren Buffett caught some investors off guard when the now 90-year old disclosed five separate investments in Japanese companies.

What he saw

At the most basic level, Buffett’s shopping spree in the Japanese stock market shows investors should have a global attitude. Sure, the “Oracle of Omaha” can buy a controlling or full stake in thousands of American companies, but he liked what he saw more elsewhere.

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Buffett acquired a 5% stake in five Japanese conglomerates with roots tracing back before Buffett’s birth, according to The Wall Street Journal. The five companies include ItochuCorp, Mitsubishi Corp, Mitsui & Co., Sumitomo Corp, and Marubeni Corp.

So why these five names? Simply put, Buffett was attracted to the Tokyo-listed shares that trade at a discounted valuation, pay investors a healthy dividend, and a lower risk profile. This marks a classic Buffett purchase, this time around completed in yen instead of dollars.

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Not on the sidelines anymore

Buffett surprisingly hasn’t gone stock shopping even after many stocks gave back years worth of gains due to the COVID-19 pandemic, WSJ noted. The one deal he confirmed took place in early July when Buffett and his Berkshire Hathaway Inc. (NYSE: BRK.A) fund confirmed the acquisition of Dominion Energy Inc’s (NYSE: D) midstream energy business.

In fact, Buffett was a seller of stocks, including airlines and some banks. His firm ended the second quarter flush with $146.6 billion in cash and many were questioning when he would make his next big move.

Unique conglomerates

The five companies Buffett invested in are known as “trading companies,” highlighted by complex business structures, businesses, and investments, according to WSJ. For example, Mitsubishi might be best known for its auto business, but the company also owns a majority stake in convenience store Lawson, owns a separate food unit that sells dried vegetables and nuts, and has a stake in oil and gas fields near Russia.

Granted, American investors face additional risks while investing overseas, including foreign exchange fluctuations and perhaps not fully understanding the business structures, JPMorgan analyst Tatsuya Kikkawa told WSJ. 

Goldman Sachs analysts crunched up the numbers and told WSJ that four of the five stocks Buffett invested in were trading at 0.75 times book value or less. This implies that for every $75 invested, it automatically generates $100 dollars of net assets in return.

Finally, Rakuten Securities strategist Masayuki Kubota noted that overseas investors tend to associate Japanese stocks with being unattractive because of the country’s aging population. But this isn’t the case as no other region in the world can match the undervalued stocks Japanese markets offer that is backed by “solid financial health and steady profitability.”