Japanese firms can fail to generate buzz but nonetheless become a better long-term investment. — Bloomberg
THEY call them the Seven Samurai.
Analysts from Goldman Sachs Group Inc caused a stir in Tokyo this week with a well-timed report highlighting a group of stocks that could serve as Japan’s equivalent of the Magnificent Seven that have come to dominate US equities.
Using a screening process to select top-performing stocks, Goldman settled on the following: Toyota Motor Corp, Subaru Corp and Mitsubishi Corp, along with four semiconductor plays in Screen Holdings Co, Advantest Corp, Disco Corp and Tokyo Electron Ltd.
I’m not convinced. (Subaru? Really?) The Magnificent Seven are more than a stock basket: Coined by Bank of America Corp analyst Michael Hartnett, the phrase took off not just because the stocks are doing well, but because they symbolise the US market, from the global dominance of Apple Inc to the irrational exuberance around Tesla Inc.
The seven don’t include some massive companies that don’t fit this framework, such as Berkshire Hathaway Inc.
The irony, of course, is that the movie The Magnificent Seven is a remake of Akira Kurosawa’s classic Seven Samurai. The US film might be better known, but the Japanese title has undoubtedly better stood the test of time.
The same is often true of Japanese firms, which can fail to generate buzz but nonetheless become a better long-term investment. (Warren Buffett might agree.)
What then might a true Seven Samurai look like?
Instead of a screening process, I’ve drawn up a list of companies that say something about modern Japan and the state of Japanese enterprise; enterprises that have stood the test of time or aged better than their US counterparts. (Note: In case you can’t already tell, this is most definitely not investing advice.)
Toyota Motor Corp: The most iconic of Japanese names is the only company in both this list and Goldman’s, and for good reason.
The automaker recently became the first Japanese company to top 50 trillion yen (US$333bil) in market capitalisation.
Its share price has doubled in the past year as investors have come to see that its contrarian stance on electric vehicles (EVs) might be the right approach: Sales of hybrid vehicles are booming, while rivals are having to reconsider a shift to an all-electric future.
That pragmatism, maintaining that EVs will be just one part of the energy transition, earned it few plaudits until lately but might pay off in the long run.
Practical leader
If we are likening these stocks to the seven samurai themselves (and, dear reader, I am happy to inform you that we are), Toyota would naturally be Kambei Shimada, the experienced and practical leader memorably played by Takashi Shimura.
Nintendo Co: No other company sums up Japanese soft power and endurance.
The Kyoto firm has defied critics who demanded it abandon its model of making both hardware and software, and has been vindicated with the success of gaming console Switch. It also symbolises the country’s increasingly smart approach to utilising its intellectual property.
Though the contribution might not show up in the bottom line, don’t underestimate how exposing millions to its characters in The Super Mario Bros. Movie box-office hit and Universal Studios theme parks will pay off for it down the line.
Nintendo also symbolises a uniquely Japanese approach to capitalism, in which shareholders are just one stakeholder. In a world where game producers are cutting thousands of jobs, Nintendo’s layoff-eschewing approach works.
In our cinematic comparisons, Nintendo would be Shichiroji, the amiable samurai that everyone likes, but who you don’t want to be in a fight with.
SoftBank Group Corp: In Seven Samurai, Toshiro Mifune’s iconic Kikuchiyo struggles for acceptance. The big-mouthed but undisciplined warrior works his way up from humble roots to eventually earn recognition as a samurai. Remind you of anyone?
Masayoshi Son’s SoftBank has similarly struggled for approval, both inside Japan (where it is often still seen as a upstart despite owning a mobile network, the largest mobile payments platform and a ubiquitous messaging app), as well as overseas.
A recognised play
Frequently mocked for failed investment bets such as WeWork Inc, Son might yet have the last laugh as his longtime bullishness over artificial intelligence is finally becoming a play recognised by the market.
Like Kikuchiyo, the company can be both erratic and eccentric, but things would be much less interesting in its absence.
Keyence Corp: The maker of industrial automation systems might be the least-known publicly, but it’s an investor darling with one of the highest operating profit margins in Japan and a market cap that has surged nearly 20-fold since 2010.
Keyence designs bespoke automation solutions and outsources the production. Domestically, it’s best known for being the highest-paying company, fitting in a country where wages might finally be rising.
Like Kyuzo, the stoic but skilled gaunt samurai of few words, Keyence has very little to say for itself: Its earnings reports are bare-bones, and the firm almost never speaks to the media.
Sony Group Corp: An uninspired choice, perhaps, but still symbolic: Like its video-game rival Nintendo, Sony represents a very Japanese approach to capitalism.
If it were a US firm, it’s possible it would have been sold for parts when struggling to find a business model to replace its once-profitable gadgets and TVs.
Instead, it has reinvented itself across diverse industries, from image sensors to anime streaming. I dub Sony as Gorobei Katayama, the second-in-command and chief strategist of the samurai.
Mercari Inc: With many companies around for decades, I also wanted to include a stock representative of Japan’s up-and-comers.
The startup scene is small but healthy, and though Mercari might not be the one that comes to represent it in future decades, the 11-year-old online flea-market firm is among the few to be successful overseas, earning a quarter of its revenue in the United States and running ads during the Super Bowl.
I also needed an example to take the role of Katsushiro Okamoto, the fighters’ unproven apprentice.
Recruit Holdings Co: Recruit, too, represents a new wave of Japanese firms.
Founded as a job-hunting magazine for students in the 1960s, which overcame an infamous political scandal in the 1980s, Recruit has grown to become Japan’s biggest Internet services provider, with its fingers in everything from staffing to restaurant bookings.
It’s also the unusual example of a domestic corporation that has made a success of a big overseas acquisition, with a third of revenue coming from the United States. Its Indeed.com platform, acquired in 2012, is now the world’s largest.
At this point the samurai comparisons are becoming somewhat laboured, but Recruit will have to fit as Heihachi Hayashida, the down-on-his luck wood-cutting ronin.
Caution needed
With Japan’s Nikkei 225 index one good day away from recording the first all-time high in 34 years, it’s worth remembering (at the risk of spoiling a 70-year-old movie) that not everyone survives to the end of Seven Samurai.
Keep in mind Shimada’s famous line: “Danger always strikes when everything seems fine.” — Bloomberg
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. The views expressed here are the writer’s own.
