An Investor’s Recipe for Success in Japan: Investing in “owner-operator” stocks can pay off nicely

SATURDAY, JANUARY 4, 2014

An Investor’s Recipe for Success in Japan

By LESLIE P. NORTON | MORE ARTICLES BY AUTHOR

Investing in “owner-operator” stocks can pay off nicely.

Google “Japanese housewife” and you get a page of X-rated links. That flagrant disrespect contrasts with the attitude toward women evident at Cookpad, Japan’s largest recipe-sharing outfit. Cookpad came public in 2009, 12 years after it was founded by Akimitsu Sano. Members submit recipes and vote on which are the best. It has become a huge hit; more than 80% of Japanese women in their 20s and 30s visit the site. “You get positive reinforcement. If you’re a housewife in Japan, you don’t get a lot of feedback,” says Ayako Weissman, who manages Asia funds for Horizon Kinetics in New York and owns Cookpad shares (ticker: 2193.Japan). In the year ended in March, the company’s earnings jumped 45% and its sales, 27%, driven by subscriptions and ads. No wonder the stock climbed about 145% in 2013.Sano, who owns more than half of Cookpad’s shares, exemplifies what Japan-born Weissman calls an “owner-operator”—a founder or relative of the person who controls a publicly traded company. Prime example: Masayoshi Son, who established and runsSoftbank (9984.Japan), which last year bought Sprint for $21.6 billion and owns 37% of Alibaba Group, China’s largest Internet company. Alibaba is expected to launch an initial public offering in New York.

RESEARCH BY WEISSMAN and her analyst, Uta Kojima, shows that owner-operator outfits since 2001 routinely have outpaced benchmarks like the Topix, MSCI Japan, and Nikkei 225. There are 300 such companies in Japan today.

One is Unicharm (8113.Japan), which makes diapers. Its CEO, Takahisa Takahara, is a descendant of the founder; the family still controls 30% of the shares. Japan’s aging population has sent adult-diaper demand soaring. The firm has also pushed into the pet market, and into other parts of Asia. Today, Unicharm has 69% of the diaper market in Indonesia, 62% in Thailand, and 40%-plus in Vietnam. Weissman thinks Unicharm’s stock can have a double-digit gain this year.

Another owner-operator company is Internet Initiative Japan (IIJI), which builds and operates broadband networks for corporate Japan and the government. In the year ended in March, revenue rose 9% and earnings, 22%. Founder and CEO Koichi Suzuki considers fivefold growth plausible. Japan will introduce a national ID system in 2016 that will require massive data-system upgrades from companies to accommodate increased reporting. Short term, earnings will be under pressure as IIJ invests in new staff, but Weissman views the stock as extremely attractive.

In 2012, she created the Japan Founders Equity fund, traded in Japan, which invests in owner-operator shares. Its portfolio is available to U.S. clients of Horizon Kinetics, whose chief investment officer, Murray Stahl, co-manages the Asia portfolio with Weissman. The Founders fund doesn’t own Cookpad because it requires that a stock be publicly traded for at least five years.

Weissman believes Japan is set, at last, to produce strong gains. Prime Minister Shinzo Abe and the Bank of Japan are trying to promote growth. Corporate earnings probably will rise 70% in the current fiscal year, ending in March, and are likely to post another double-digit gain in the following year. Japanese shares trade at 1.2 times book and 13 times earnings.

That, as Cookpad fans might say, is a recipe for success.