[Global Focus] Stock Price Rises 39% in 5 Months... Will Buffett's 'Love for Japanese Sogo Shosha' Continue?

Reviewing the Japanese Stock Market
Driving the Market with Increased Shareholdings in April and June This Year
Generating Profits from Energy and Raw Materials Businesses
Investing in 'Undervalued Companies' Aligns with Buffett's Philosophy
Stock Prices Expected to Be Greatly Influenced by Energy Prices
Attempts to Diversify Businesses into Renewable Energy and Copper

The news of Warren Buffett, the "Sage of Omaha," investing in Japan has become a signal for the revival of the Japanese stock market. In April, when Buffett expanded his stakes in Japan's five major general trading companies, their stock prices surged, driving the market's upward trend. Japan's representative index, the Nikkei 225, surpassed the psychological barrier of 33,000 points for the first time in 33 years, fully enjoying the so-called "Buffett effect." Market attention is also focused on the five trading companies in which Buffett actively invested. Given Buffett's investment philosophy favoring long-term investments centered on value stocks, optimism is spreading that the long-term growth of these companies is guaranteed. However, some cautious voices argue that, due to the cyclical nature of general trading companies, it remains to be seen whether the stock price uptrend can be maintained without the Buffett effect.

Buffett’s Average Stock Price Rose 56.25% After Increasing Stakes in April

Buffett first announced his purchase of shares in Japan's five major general trading companies in August 2020. Berkshire Hathaway, the investment company led by Buffett, acquired more than 5% stakes in Itochu Corporation, Mitsubishi Corporation, Marubeni Corporation, Mitsui & Co., and Sumitomo Corporation at that time. Subsequently, in November of the following year, Berkshire Hathaway increased its stakes to the 6% range, and then further increased its holdings in two rounds in April and June this year, raising the average stake to over 8.5%.

According to documents disclosed by Berkshire Hathaway in June, Itochu's stake increased from 6.21% to 7.47%, and Sumitomo's from 6.57% to 7.47%. Stakes in Mitsui & Co. and Marubeni rose from 6.62% to 8.99% and from 6.75% to 8.3%, respectively.

As a result of aggressive stake expansion, Buffett's investment performance showed favorable results. Since the report on April 11 that stakes had increased to the 7% range, the stock prices of the five trading companies rose by an average of 39.18% over five months. This is more than double the Nikkei 225 index's rise of 18.15% during the same period.

By company, Mitsubishi closed at 7,583 yen on that day, marking a 56.25% increase compared to the time of the report. Itochu closed at 5,711 yen, up 35.88%, and Sumitomo closed at 2,830 yen, up 30.71%. Mitsui & Co. and Marubeni closed at 5,653 yen and 2,473 yen, respectively, with stock prices rising 39.31% and 33.75%.

The factors behind the stock price rise of the five trading companies include Buffett's investment news and active shareholder return policies. Mitsubishi announced a 300 billion yen share buyback plan in June. The other four companies, including Itochu, set dividend payout ratio targets between a minimum of 30% and a maximum of 35% for fiscal year 2023 (April 1, 2023 ? March 31, 2024).

Despite the sharp drop in international commodity prices, second-quarter earnings performed better than expected, also driving stock price gains. The core business portfolios of the five trading companies are concentrated in natural gas, oil, minerals, and other commodities and energy sectors. Although all five companies saw net profits decline by 7% to 30% year-on-year due to falling commodity prices, they defended against the price drops with diversified portfolios including convenience stores and food businesses, achieving higher profits than market expectations.

Five Trading Companies Align with Buffett’s Investment Principles... Undervalued Stocks

Buffett recognized the investment value of the five trading companies early on. These companies perfectly matched Buffett’s investment philosophy of buying competitive but undervalued companies at a bargain price.

Itochu Corporation headquarters located in Tokyo, Japan
[Image source=Bloomberg]

First, it aligned with his principle of investing in companies he knows well. Buffett focused on the similarity between the business structures of the five trading companies and Berkshire Hathaway. Berkshire Hathaway has recently concentrated investments in U.S. energy businesses such as Cove Point LNG, and the five trading companies also generate most of their profits from commodities and energy businesses. For example, Marubeni derives over 90% of its sales from metals and energy chemicals. The other four companies generate 30-40% of their profits from commodity businesses. Buffett also judged that the five trading companies’ diversification into convenience stores, food businesses, and other sectors resembled Berkshire Hathaway’s diversified investment across multiple industries.

Moreover, Buffett considered the five trading companies to have high stability from a long-term perspective. Having been established for over 100 years and proven their management capabilities, and having expanded into various industries such as IT, healthcare, and aerospace, they are expected to sustain growth even if commodity prices fall.

Another reason Buffett found the five trading companies attractive was their undervaluation. The average price-to-earnings ratio (PER) of Japanese companies is around 12-13 times, while the five general trading companies are only at 6-7 times. The price-to-book ratio (PBR), which indicates how many times the stock price is traded per share, is below 1 for four of the five companies except Itochu (1.2 times). Additionally, Buffett leveraged Japan’s low interest rates by issuing yen-denominated bonds through Berkshire Hathaway, enabling low-cost borrowing to fund investments.

"Concerns Over Sensitivity to Economic Cycles" vs. "Expectations for Profit Generation Through Business Diversification"

Some voices express concern that the stock price rally of the five trading companies could end if the Buffett effect disappears. Since energy and commodity businesses account for a large portion of their profits, stock prices could be significantly influenced by future energy price trends.

Warren Buffett

In the past, the five trading companies enjoyed strong performance during the resource development boom in the 2000s but suffered losses ranging from several billion to hundreds of billions of yen due to the decline in international commodity prices in the mid-2010s. In fiscal year 2016, Mitsubishi recorded a massive loss of 150 billion yen for the first time since its founding.

However, experts remain positive about the outlook for the five trading companies over the next five years. This is because these companies have actively diversified their business portfolios since the resource development bubble burst.

Mitsubishi, for example, is pursuing an investment strategy that integrates its core mineral business with eco-friendly initiatives. The company anticipates increased demand for electric vehicles and is investing in renewable energy and hydrogen, as well as strengthening its copper business used in EV batteries. Mitsui & Co. is expected to earn 240 billion yen in profits from its machinery sector this year. It has adopted healthcare as a mid- to long-term business strategy and acquired an 18% stake in IHH, Asia’s largest private hospital group. Mitsubishi Corporation is investing in salmon farming, while Marubeni has invested in Helena, the second-largest agricultural chemical distributor in the U.S. Itochu’s subsidiary, convenience store chain FamilyMart, continues to grow steadily, showing strength in the consumer lifestyle sector.

Japan’s economic magazine Diamond evaluated, "The strength of general trading companies lies in their dense global information networks," adding, "Based on this, they can redistribute management resources to sectors expected to increase profits, thereby enhancing profitability." It further explained, "The key challenge is how well they can identify good business sectors and succeed in monetizing them," noting that "there remains a possibility that stock prices will vary accordingly."