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Three Japanese Icons You Must Sell

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For decades, these companies represented the best quality, most innovative products on the consumer and industrial markets...but how the mighty have fallen.

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Many investors have piled into Japan lately, reasoning that somehow this will be "the year" Japan turns around and there will be lots of money to be made.

I don't disagree-only the big profits are on the short side, especially when it comes to these three iconic Japanese tech brands. As I quipped earlier in the year, it's more likely that Godzilla will walk out of Tokyo Bay again than it is that Japan will suddenly rebound.

I am well aware that this is not a popular thought, and that it will likely earn me my share of wrath on the Internet. Save your breath and your keystrokes. Having spent more than 20 years in country, I am intimately familiar with the arguments.

For example, value-oriented investors consistently remind me that the Nikkei is "dramatically undervalued." I am also well aware of the "construction boom" that was supposed to follow the tsunami and nuclear crisis. And I still continually hear from the statistically motivated that the Japanese economy just "has to turn around" because it's exceedingly rare that an economy remains in the doldrums after 20 years.

Let's review. The Nikkei remains 75.5% off its December 29, 1989, peak for a reason. That means it's going to take a 308.19% gain just to get to break-even, based on where it's trading as of this writing.

If you think that's a sure thing, I'm happy for you but wish to point out that business conditions now are hardly conducive to the kind of growth that got the Nikkei there in the first place. The entire society is deleveraging. Consumers are tapped out and the government is a wreck.

As for the construction boom, that's a misconception. As I noted in a flurry of interviews following the terrible events of March 11, 2011, only a few companies are going to enjoy any sort of revenue expansion whatsoever. Sure, there might be a short-term pop, but the majority would experience significant drops in revenue and exports resulting from production losses and a post-quake strengthening of the yen that will compound the efforts to regain lost ground.

And finally, as for the notion that markets simply don't stay down for this long...says who? It was inconceivable in 1990 that Japan would lose a decade-let alone three. Nine failed stimulus programs and 22 years later, the Japanese economy has just lurched into another technical recession this week. The rules of the game have changed.

Clearly, the markets can, as the old saying goes, remain illogical far longer than investors can remain solvent. Here's the Reader's Digest version of my thinking:

  • The consumer electronics upon which many Japanese tech companies built their prowess have been commoditized. You can't tell one product from another. And, more to the point, how many televisions and stereos do you really need in an Internet age that's increasingly defined by mobile devices?
  • Hungry, capable foreign competitors are outmaneuvering, out-engineering, and outthinking Japanese companies in markets they once dominated. This is forcing a fight for survival that Japanese executives didn't realize they were involved in until very recently. Many still don't get it, frankly.
  • The Japanese yen has risen more than 28.01% since December 2007, making Japanese products prohibitively expensive in global markets and pinching margins in the process. At one point, it was up 34.17%, but has since backed off a bit, over the same time period.

Three Japanese Brand Names to Short
So here's my "short" list-pun absolutely intended. You'll note that all three companies are heavy in the television space, which is seeing declines across the board every year worldwide as consumers shift to mobile and Wi-Fi-driven devices.

Sony Corporation (NYSE:SNE):Once the undisputed king of all things cool and innovative, Sony is a shadow of what it once was. Apple (NASDAQ:AAPL) not only ran the company over, but has left the once-proud brand struggling over its own identity in nearly every product segment where it once set the standard.

It's missed the Internet, mobile computing, digitalization, and even software, despite creating some of the greatest technology the world has ever seen-portable music players, flat panel displays, and streaming content-well before competitors like Apple even thought about it.

But have no fear, says CEO Kazuo Hirai. The company is streamlining operations and plans to recoup more than $8.8 billion in losses by 2014 producing...you guessed it, more televisions. Aye yigh yigh.

In particular, Sony is pinning its hopes on a new $21,500, 84-inch television called the Bravia and overseas sales of the same big screen high-definition monster.

A $21,500 television in today's economy makes about as much sense as Steve Ballmer's new plan to re-merchandise Microsoft (NASDAQ:MSFT) and compete with the world's number one designer, Apple, as a goods company. It'll probably be about as effective, too.

Sharp Corporation (PINK:SHCAY): While Sharp has a diverse product line, more than 60% of its product line revenue comes from TVs. But how many TVs does the world need, and how do you tell one brand from another?

Sharp's bonds imply a better-than-90% probability of default within the next five years. Several key "Hail Mary" survival negotiations have failed, including was what to have been an $8.43 billion infusion from Foxconn's Terry Gou.

Now rumors persist that Apple's going to ride to the rescue, or perhaps Intel (NASDAQ:INTC). Even Dell (NASDAQ:DELL) is rumored to be in the mix. But to what end?

Sharp posted a 376 billion yen (approximately $4.6 billion at today's exchange rate) loss in 2012, and has already posted losses in excess of $1.29 billion in the first half of 2013. To make matters worse, increasing competition in every one of its product segments has put the company in slash-and-burn mode.

The company itself has expressed material doubt about survival. In September, Bloomberg reported the company is considering cutting 10,000 jobs (18% of its workforce), and it was forced to sell overseas TV assembly plants and shutter solar panel businesses in Europe and the United States in order to secure a 210 billion yen (approximately $2.5 billion) bailout from Mizuho Financial Group and Mitsubishi UFJ Financial Group. It's seeking early outs for retirees and reducing pay for remaining workers.

Japanese experts suggest that the way ahead depends on more capital and its IGZO display technology...but who in their right mind would give it to Sharp, and on what terms?

Panasonic Corporation (NYSE:PC): And finally, there's Panasonic. Once at the vanguard of Japanese exports, the company stunned Wall Street by forecasting a $9.5 billion loss come March when its fiscal year ends. That's 30 times bigger than estimates in place at the time in early November when it stunned the financial community with the news.

I personally think the losses will be bigger, based on the rapid and near-complete failure of consumer electronics sales worldwide, and the emergence of hotly competitive, better-margined alternatives, not the least of which are mobile devices.

Fitch lowered Panasonic's credit rating to junk on November 22, and the continued operations are marginal because of increasing liquidity constraints. The company announced earlier that same month that it won't pay a dividend for the first time since 1950 because of dire business conditions.

Panasonic simply doesn't have its feet on the ground, and at this point in the product development cycle is unlikely to catch up, especially when you consider that it's shown nearly 40,000 workers the door in the past 12 months.

In closing, hold no illusions. These are all extremely opportunistic choices for very aggressive investors and traders who understand that profits can be made in two directions-up and down.

Risk control is paramount under the circumstances, as is the ability to endure the volatility associated with last gasps that inevitably come with dying companies.

Editor's Note: This article was written by Keith Fitz-Gerald of Money Morning.

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No positions in stocks mentioned.
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