Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Stephen Harker. He's manager of the Man Core Alpha Japan Fund. Hello.
Stephen Harker: Hello.
Black: So, you're a value investor. So, three value stocks for us today. Where would you like to start?
Harker: I'd like to start with Honda Motor.
Black: What do you like about that?
Harker: Honda is a big company. It's one of the top companies listed in Japan. It's got two businesses. First of all, motorbikes and motorbikes is the jewel in the crown basically. It's focused on emerging markets, Brazil, Thailand, Vietnam, which is their most profitable market, India, and Indonesia. And they've basically won the war. They've beaten Suzuki, Yamaha and Kawasaki over the last 20 years, and they are dominant now and have a really high market share, and very high margin business, is very solid, growing business and looking really strong for the future.
Black: Well, that all sounds great. Why are they out of favor?
Harker: I don't know. They've been underperforming for a long period and becoming cheaper and cheaper and cheaper. And we've got a big position, and we just hold it. So, the second part of the business is autos. They make cars obviously. And that's more of a developed market business rather than the developing, although they've got a big operation in China. North America is important. Japan is important. But they've been very selective historically in choosing the markets where they think they can have an impact as a sort of large rather than a giant car company. And obviously, the cyclical problems, you know, the car industry is going through a radical change. So, things aren't going that well at the moment. But it's profitable and likely to do better in future.
Black: Cool. So, what is stock number two?
Harker: Stock number two is Mitsubishi UFJ, Japan's biggest bank, number two stock in TOPIX, another giant company. All of these stocks are – whenever we buy a stock, the characteristics of that stock are the same. So, we've been doing this for 33 years, the same thing, buy low, buy cheap, and hopefully, sell it at a higher price. And the big companies, very cheap, and Mitsubishi UFJ has become cheaper and cheaper and cheaper. It's trading at a 60% discount to the market average. It's invested globally. It's not just a Japanese bank. It owns over 20% of Morgan Stanley. It owns regional banks in the U.S. It owns banks in the far east as well. And it's a really solid business. It's conservative. It survived the bubble collapse. And it's just got cheaper and cheaper and cheaper. And we think that it's a really cheap stock that will do better.
Black: And presumably, there's quite a sort of digitalization of payments boom in Japan at the moment. It should benefit from that?
Harker: That would be perceived to be a risk. I mean, the Japanese society is extremely conservative, and they are moving towards digital online banking and all the other stuff in a much more leisurely fashion, shall we say, than in the West. The U.K. is much further ahead. There are benefits and pluses and minuses on that. But I mean, I think they're so big and so powerful, that they will be able to find a way through that.
Black: So, what's our final stock.
Harker: The final stock is Nippon Steel, another giant, the biggest steel manufacturer in Japan, blast furnace. Steel is going through a really difficult time globally. But we think that again, Nippon Steel is at a 60% plus discount to the market. And steel is a long cycle business. I started doing Japan in 1984. And Nippon Steel was going into a bottom at that time. And it blossomed also in the late 90s. And it's probably bottoming now. And the peak to peak cycle in terms of stock market movement has typically been about 15 to 17 years. And we think that it's now 12 years since the bottom. So, in order to be at the next peak in 15 years, it's got to go up sometime soon. So, we think that that's an absolutely rock on buy. I mean, I think it's a really good stock.
Black: And why is steel having a tough time?
Harker: Steel is cyclical. The steel is sold to cars, to make cars, to make machinery, principally a lot of construction steel, and those sectors are under pressure. In addition, the Chinese have grown capacity dramatically over the last 10 years, and now are producing over 1 billion tons of steel. So, there's a lot of supply on the market, but it's essentially a cyclical situation.
Black: Well, thank you so much for your time.
Harker: Thank you.
Black: And thanks for joining us.
