Why Warren Buffett is investing in Japan and how to know if you should too

Published Tue, Apr 11 202312:55 PM EDT

Warren Buffett has grown even fonder of his favorite Japanese trading houses, hiking his already-large investments and teasing of more to come. Berkshire Hathaway raised its stakes in five Japanese trading houses — Mitsubishi Corp. , Mitsui & Co ., Itochu Corp. , Marubeni and Sumitomo — all to 7.4%. The 92-year-old investor even traveled to Japan this week, his first time in more than 11 years, to meet with the heads at these firms to emphasize his support, Nikkei reported. Buffett will appear live from Japan on CNBC's "Squawk Box" on Wednesday from 6 a.m. to 9 a.m. ET to discuss his investments there. The five trading houses — roughly akin to a conglomerate structure, just like Berkshire— seem to check every box of Buffett's stock-picking criteria. First, they are classic value stocks, with a forward price-to-earnings ratio of 6.8, far lower than the average 12.5 for in the MSCI Japan index. Second, they sport a better expected dividend yield, 5.2% on average, versus 2.7% for the broader Japanese stock market. Third, the companies produce prodigious free cash flow, typically an attractive trait for Buffett, according to Bill Stone, CIO at Glenview Trust and a Berkshire shareholder. Stone said there are also two added bonuses in terms of hedging currency risk and deal-making potential. "Berkshire can borrow very cheaply in yen and essentially the liability in yen can help hedge the currency exposure of the Japanese stock holdings," Stone said. "Also, Buffett mentioned that he would like to do deals with the firms and has made efforts to do more international acquisitions in the past." The "Oracle of Omaha" first acquired these stocks on his 90th birthday in August 2020 through regular purchases on the Tokyo Stock Exchange. His stakes were worth about $6 billion at the time. Late last year, he increased his bets by about $2.4 billion. Four of the five stocks have more than doubled since Buffett's initial purchases. Berkshire said in 2020 he planned to hold the investments for the long term, and that he might increase the positions in any of the companies up to a maximum of 9.9% , depending on price. The Japanese trading firms, also known as sogo shosha, are highly diversified companies involved in a wide range of products and services, including energy, machinery, chemicals, food, finance and banking. They have been vital to the Japanese economy and global trade since they emerged in the post-WWII period. "While these firms are referred to as trading houses, they are really conglomerates and this is a business model Buffett and Berkshire know and love," said Cathy Seifert, Berkshire analyst at CFRA. "This transaction also gives Berkshire some overseas exposure at an attractive valuation." More Japanese investments? In the interview with Nikkei, Buffett also said additional investments in Japan are "always a matter of consideration," adding that "there are always a few I'm thinking about." His latest move came at an interesting time for Japan's macro economy. Bank of Japan governor Kazuo Ueda recently took the helm, and many investors have speculated that his new leadership could lead to a hawkish pivot to tame surging inflation. Japan has also stuck with its negative interest rates. The Bank of Japan first introduced negative rates back in 2016 to boost its economy, fend off a spike in its currency and fight off deflation. In light of expectations for tighter policy, BlackRock , the world's largest asset manager, last month cut Japanese stocks to "underweight." Others, however, believe there are opportunities in the Japanese markets and individual names that could benefit from a shift in monetary policy. "I find the valuations very attractive and it's a way to play the reopening of China," said Peter Boockvar, CIO at Bleakley Financial Group, of Japanese equities. "I'm particularly bullish on Japanese banks that could benefit if the BOJ alters policy." The Nikkei 225 is trading around 16 times forward earnings, compared to a price-to-earnings ratio above 22 just two years ago, according to FactSet.