3 Stocks to Buy After Goldman Sachs and Morgan Stanley Get Bullish on Japan

While most economies are still grappling with the rapidly spreading COVID-19 omicron variant, Japan is boasting a high vaccination rate. According to Statista, as of November 30, 2021, more than 72% of the third-largest economy’s population was fully vaccinated (two doses). The country is also accelerating COVID-19 booster shots and securing oral medicines, which will likely help the economy recover faster.

According to a Reuters report, the Japanese government is considering raising its economic growth forecast for fiscal 2022, accounting for its record $490 billion stimulus package. In addition, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) provided a positive outlook on Japan’s growth prospects, given its low inflation, cheap valuation, and high vaccination rates. They have set a 2,250 12-month target for the benchmark Topix index.

Given this backdrop, we think it could be wise to bet on quality Japan-based stocks Honda Motor Co., Ltd. (HMC), Sumitomo Mitsui Financial Group, Inc. (SMFG), and Canon Inc. (CAJ). They are trading at discounts to their peers and have immense growth potential.

Honda Motor Co., Ltd. (HMC)

HMC in Tokyo  develops, manufactures, and distributes automobiles, power products, motorcycles, and other products. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life creation and Other Businesses. Also, it sells spare parts and provides after-sale services through retail dealers, independent distributors, and licensees.

On October 14, HMC announced plans to debut its first EV brand in China. HMC, along with its local partners Dongfeng Motor and GAC Group, will set up new production lines to roll out EVs under its e:N Series brand. It is expected to roll out 10 models over the next five years, which could help boost its revenue.

HMC’s sales revenue for the six months ended September 30, 2021, increased 21% year-over-year to ¥6,988.20 billion ($61.54 billion). Its operating profit came in at ¥442.10 billion ($3.89 billion), up 161.2% year-over-year. And for the six months ended September 30, 2021, its profit for the period increased 143.2% year-over-year to ¥389.20 billion ($3.42 billion).

In terms of forward EV/S and P/S, HMC’s respective 0.71x and 0.36x are lower than the 1.40x and 1.12x industry averages. Furthermore, its 3.44x forward Price/Cash Flow is 71.4% lower than the 12.05x industry average. Analysts expect its revenues for fiscal 2022 to increase 357.7% year-over-year to $129.49 billion. Its EPS for fiscal 2023 is expected to increase 29.4% year-over-year to $4.22. The stock closed yesterday’s trading session at $27.36.

HMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

It has an A grade for Value and a B grade for Stability. It is ranked #6 out of 67 stocks in the Auto & Vehicle Manufacturers industry. Click here to check the additional ratings of HMC for Growth, Momentum, Sentiment, and Quality.

Click here to check out our Automotive Industry Report 

Sumitomo Mitsui Financial Group, Inc. (SMFG)

SMFG is engaged in commercial banking, leasing, securities, and consumer finance business. The Tokyo-based company operates through five business segments: wholesaler, retail, international, market, and Head office management.

On July 14, 2021, SMFG announced its plans to buy 5% of Jefferies Financial Group Inc.'s shares for $386 million. This acquisition could help the company expand its reach in the United States.

For the six months ended September 30, 2021, SMFG’s consolidated gross profit increased 3.9% year-over-year to ¥1431.28 billion ($12.60 billion). Its net business profit increased 6.3% year-over-year to ¥586.07 billion ($5.16 billion). And  its profit attributable to owners of its parent came in at ¥456.06 billion ($4.01 billion), up 68.8% year-over-year.

In terms of forward P/S, SMFG’s 1.81x is lower than the 3.27x industry average. Furthermore, its 7.76x forward GAAP P/E  is 26% lower than the 10.50x industry average. For its fiscal year 2023, SMFG’s EPS and revenue are expected to increase 12.1% and 1.5% respectively, year-over-year to $0.96 and $12.80 billion. The stock closed yesterday’s trading session at $6.67.

SMFG’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which translates to a Buy in our proprietary rating system.

It has an A grade for Sentiment and a B grade for Stability. It is ranked #16  of 97 stocks within the Foreign Banks industry. To see the other ratings of SMFG for Growth, Value, Momentum, and Quality, click here.

Canon Inc. (CAJ)

Tokyo-based CAJ develops, produces, and sells office equipment, imaging systems, medical systems, industrial equipment, and related services. Its products include laser printers, compact digital cameras, X-ray diagnostic equipment, and ultrasound diagnostic equipment.

On September 28, 2021, CAJ launched the imagePROGRAF GP Series, the first aqueous inkjet model to include fluorescent pink ink. Th series also produces vivid neon colors for high-value-added output and graphics, which will likely help attract more consumers.

CAJ’s net sales for its fiscal third quarter ended September 30, 2021, increased 9.8% year-over-year to ¥833.30 billion ($7.33 billion). The company’s gross profit came in at ¥387.95 billion ($3.41 billion), up 18.4% year-over-year. Also, its net income increased 196.1% year-over-year to ¥49.31 billion ($0.43 billion).

In terms of forward P/S, CAJ’s 0.84x is lower than the 3.96x industry average. Also, its 14.51x forward GAAP P/E is 50% lower than the 29.04x industry average. Analysts expect its EPS and revenue for fiscal 2021 to increase 131.1% and 7.2% respectively year-over-year to $1.71 and $31.73 billion. It surpassed the Street’s EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 2.1% in price to close yesterday’s trading session at $24.78.

CAJ’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating,  which translates to a Buy in our proprietary rating system.

It has a B grade for Value, Stability, and Quality. It is ranked #5 out of 51 stocks in the Technology – Hardware industry. Click here to see the ratings of CAJ for Growth, Momentum, and Sentiment.

HMC shares were trading at $27.55 per share on Tuesday afternoon, up $0.19 (+0.69%). Year-to-date, HMC has gained 0.02%, versus a 24.87% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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