My True Wealth readers are quietly sitting on 46% gains in the second-oldest open position in our portfolio…
It’s a trade most folks have forgotten about, thanks to the amazing run in U.S. stocks.
The opportunity is in Japanese small caps through the WisdomTree Japan SmallCap Dividend Fund (DFJ).
I first recommended DFJ in February 2010. DFJ holds a basket of dividend-paying, small-cap companies based in Japan. And today, it’s one of the best opportunities around the globe. And the 46% gains we’ve made could be just the beginning.
[ad#Google Adsense 336×280-IA]Let me explain…
Longtime readers know the ongoing “Abe’s Revenge” story in Japan.
In September 2007, the unpopular Shinzo Abe resigned as Japan’s leader. After his resignation, Japan’s stock market (the Nikkei 225) fell by half.
And the Japanese yen soared 40% against the U.S. dollar. But in 2012, Abe came back for his revenge when he was elected prime minister.
His goal when he was re-elected was to move Japan from deflation to inflation. In short, he promised he would do everything he could to kick-start the Japanese economy.
To do that, Abe immediately began U.S.-style quantitative easing, but at a much faster rate. He has also been working to put massive immigration reforms in place to increase growth and improve demographics.
Abe’s reforms are for real, but he has been struggling with changing the mentality of the Japanese people. Many are resistant to change in Japan’s corporate world.
In May, hedge-fund manager Dan Loeb sent a team to check out Abe’s progress.
Loeb is the founder and fund manager of Third Point Management, a roughly $14 billion hedge fund. Loeb’s flagship fund – the Third Point Offshore Fund – has produced nearly 18% annualized returns since 1996. That’s more than double the S&P 500’s 7.5% return over the same period. And Japan has been on his radar for a while – Loeb is heavily invested in the country.
Here’s what Loeb wrote in his Second Quarter Investor Letter about what his team found out…
Though Prime Minister Abe and other leaders appear committed to changing Japan, shifts of this magnitude do not happen overnight. Moving a country from a culture of persistent deflation to an inflationary environment will only happen slowly.
We are seeing early signs that the government’s growing support for improved corporate governance and increased focus on shareholder returns is impacting Japanese companies, a few of which have adopted measures addressing these areas recently.
In short, you can’t change the psyche of an entire country in an instant. But Loeb expects these headwinds to become tailwinds by the end of the year.
“[Japan’s] desire for reform is acute and widespread,” Loeb wrote.
With Abe’s reforms slowly beginning to work, and a brilliant investor like Loeb on our side, I’m excited to put money to work in Japan… even after gains of 46%.
The absolute best way to do it is with Japanese small caps, through shares of DFJ. These stocks offer incredible value today… versus both Japan and the United States.
Check out the table below. It shows just how cheap Japanese small caps are right now…
As you can see, Japanese small caps are more than 60% cheaper than U.S. stocks, on a price-to-book-value basis. And seeing a group of stocks trade for less than half of sales is the very definition of crazy-cheap. This is an opportunity you don’t want to miss!
My True Wealth readers show a 46% gain in shares of DFJ since February 2010. That’s better than the 43% return (in U.S. dollar terms) the Nikkei 225 showed over the same period.
But this gain could be just the beginning…
Shinzo Abe is making changes in Japan. And according to one of the best investors in the world, Japanese stocks could soon have tailwinds pushing them higher.
I expect the overall Japanese market to perform well as Abe’s progress continues. And with Japanese small caps offering such incredible value, they should continue to outperform the overall Japanese market in the years to come.
Good investing,
Steve
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Source: Daily Wealth