Research Methodology

Nihon Equity Research finds small- and medium-size Japanese stocks that are poised to record substantial price increases over the next 12 to 18 months. We have the business contacts, financial acumen, and investment know-how to expertly research and evaluate Japanese equities. We are completely bilingual, so we can quickly examine massive amounts of financial information from both standard and little-known Japanese sources. Our research universe extends beyond the high-profile, first-section TSE stocks to include issues on smaller exchanges – eg, Jasdaq, Mothers, and Hercules -- that often receive little attention from fund managers.

Our methodology is grounded in fundamental analysis but tailored to the peculiar requirements of Japanese stock markets. We customize our research to meet client objectives and have the flexibility to adopt our methods to client needs. Here is an overview of our approach:

1. Determine client requirements We first establish the client's unique needs and investment goals. Our assessment includes asset allocation, growth versus value, market caps, return benchmarks, country allocation, risk, sector allocation, and liquidity.

2. Find sectors with outstanding potential  We assess the prospects for the Japanese economy using both public and private resources. We determine which sectors will record the fastest growth in this economic setting, based on our interviews with Japanese executives and scrutiny of industry data. Our selections are strongly influenced by the financial, legal, and social currents that will have a powerful impact on Japanese business. These factors include postal system deregulation, the aging of the population, and the unraveling of cross-shareholdings.

3. Calculate company growth rates  Within these high-potential industries, we forecast sales, dividends, and cash flow growth for each company, focusing on individual product lines, operating margins, industry trends, and the economic outlook. We smooth growth rates for dozens of metrics, including both renketsu (consolidated) and tandoku (parent-company) financial measures, as well as nonfinancial indicators of performance. For each company, we compare projections against peer averages.  

4. Assess the company's financial strength  We appraise the company's financial muscle through extensive ratio analysis, evaluation of earnings quality, and estimates of positive operating cash flow. We make certain the company has the financial stability to achieve its performance targets, 

5. Define and analyze risk factors We determine risk to growth and earnings performance based on management quality, competitive strength, customer loyalty, adequacy of supply, workforce quality, legal factors, and other elements of their operations.

6. Determine the stock's "sleeper quotient"  In other words, we answer the question: Does this company remain largely undiscovered? We look at trading volumes, price movements, market cap, and other factors.

7. Appraise owner benefits We look at management's stance toward shareholders. Are managers handling shareholders’ money rationally?  Has management increased shareholder value?  

8. Perform valuation analysis We set a threshold of a minimum 25% discount to intrinsic value, calculated from our cash flow growth forecast discounted by the company’s cost of capital.