Do you have a “core criterion” for stock picking? Introducing the key points and stocks to watch for the next adjustment phase
When I search for stocks“what I would like to buy when the market as a whole next undergoes a downturn”is the viewpoint I have. The main points of interest are as follows.
- ① Companies with stable earnings that are already undervalued
- ② Expectation of long-term growth
- ③ Currently weak but with prospects for recovery
Stable earnings and already undervalued
Regardless of the economy,stable earningsare expected,at a price below PER 10xor such undervalued levels. This is one of the fundamentals of value stock investing.
Understanding the concrete reasons for stock price weaknesshelps with analysis. Sometimes stocks are selling off on sentiment alone, and in reality the impact is not so large or it is temporary.
Speaking of now, for examplereal estate leasing businessesare notable. The issues with Suruga Bank and Pumpkin Carriage have cast a troubling air over the real estate industry. In the past, many companies went bankrupt due to stagnation in the real estate market.
However, for those who own properties themselves and engage in rental business, the impact is not so great.A decline in the real estate market does not mean residents leave apartmentsnor do rents drop dramatically.
Companies that operate such“stocking businesses”can hold their stock with confidence even amid stock price declines or temporary dips in earnings. If profits are earned, they can reinvest them to grow further.
If we name specific stocks, they would be like the following.
- Mainichi Corp Net (8908) PER 11.9x
- JSB (3480) PER 9.1x
- AMBITION (3300) PER 8.1x
Long-term growth is expected
This does not have to be deeply undervalued, but it is a stock with long-term, stable growth expectations. It is close to Buffett’s idea of“permanent holding stock”in a sense.
Key is that the business has a broad base and thus an economic moatthat can sustain wide profits and reinvest those profits into a broad field of expertise. A distinctive strength yields substantial profits, and reinvesting those profits into a broad area allows for sustained high profitability and scale growth.
Also, it is important not only that the current market share is high, but thatthe service rides the big trends of the era. What matters is the present, but more so the future.
For example,Microsoft (MSFT)used to have a Windows-centered business model, but gradually shifted towardcloud computing. This shift rapidly gained traction due to the spread of smartphones, faster mobile networks, and AI activation.
Today, Amazon and Microsoft compete for the top spot globally. This business model is such thatcustomers who adopt it incur high switching costs, giving incumbents an advantage and widening the gap with lower competitors.
Microsoft has the comfort of its Windows heritage. It also integrates well with existing software. Indeed, this is abusiness where the economic moat aligns with the flow of the times.
PER is 23.8x, which is a "comfortable" level. Still, it is a stock worth buying, and one would hope for a market correction to buy at a better price.
Currently weak but with recovery prospects
For stocks that are weak now, the PER is not very meaningful. If profits are small, PER becomes high, and if there is a loss, it cannot be calculated in the first place.
In such cases,why they are in the red, andwhether they have the power to bounce backis what to determine. If a recovery is expected, we calculate the prospective profits when earnings recover and the PER at the current stock price in that scenario.
By doing this, you may find a stock with a very small “hidden” PER during market downturns, i.e., a very cheap stock. Moreover, during market corrections, it tends to fall further, increasing undervaluation.
Until last year, the economy was good, making it hard to spot deteriorating-earnings stocks now, but if forced to name one,Mizuho Financial Group (8411)would be the example.
It announced a special loss of 680 billion yen due to system impairments,the current forecast PER jumped to 55.7x. On the other hand, it can be seen as having released the accumulated issues, and it has already indicated cost-cutting measures such as workforce reductions.
Using the five-year average EPS, the PER is 6.9x, indicating considerable undervaluation. While we cannot be sure about interest rates, the cost-cutting effects can be anticipated. A dividend yield of 4.3% is also reassuring.
When looking for stocks,having some guiding framework makes the view much different. Applying hypotheses about what constitutes undervaluation and what would drive stock price growth can greatly enhance investment performance.
