Are Japan’s Materials Stocks Oversold? - Examing Absolute and Comparative Valuations

Key Points

• Current valuations could well suggest that we are in oversold territory. Eighteen of the thirty – primarily electronic materials –stocks we examined are trading below book value. Seventeen are under the 10.0x EV/OP ratio we normally consider to be a dividing line. 
• Admittedly, some stocks trading on low PBRs may be value traps. It is, therefore, incumbent upon investors to combine consideration of a company’s valuations with judgements on the fundamental outlook, to gauge its potential. 
• To examine relationships between value and profitability, we construct comparisons of ROE vs. PBR, PER vs. PBR, EV/OP vs PBR, and EV/OP vs ROE. We also include reference to shareholder return data. 
• Shares which arguably represent the best investment prospects at this point are those with a reasonable fundamental case, which also score well on several valuation and profitability parameters. 

In this report we highlight companies which we think are potentially attractive and those we feel are over-valued.

At the end of the report, we include reference data for ROE, PBR, PER, EV/OP, and dividend yield.