Japanese Stocks

Hi Serenity,

I have noticed what looks like an error, when filtering the Berlin stock exchange a lot of listed Japan's stocks appear however their financials are in Yen while the stock price is in euro and therefore all the ratios as % are completely inflated. The same stocks work out fine in the Tokyo stock market though.

Why the Japanese stock market contains so many undervalued stocks? There are literally hundreds of stocks many of which appear to simultaneously clear the criteria for both NCAV and defensive and many have intrinsic value % of well above 200%.

Dear rc2752,

Thank you for your forum post!

Serenity sources all financial data from its data provider — Finnhub Stock Api. This issue has been escalated to them and will be updated as soon as they respond.

Update

Based on an update from Finnhub, all such stocks now have their Previous Close values set to Zero so that they no longer display an Intrinsic Value(%). However, their Graham Grade and Intrinsic Value remain intact and they can still be shortlisted by their Graham Grades on the screeners.

This change is intentional, and only happens where the stock trades in a different currency than the one its financials are in. This should only affect ADRs and other such foreign stocks on certain exchanges.

This is done to ensure that Serenity errs on the side of caution, and no stocks are shown as wrongly clearing Graham's criteria.

Thanks for your response. I was also curious to understand if there is a macroeconomic factor or what is the reason why Tokyo stock exchange is flooded with defensive stocks unlike other markets? Unless there is some issue in the data. Thanks

Dear rc2752,

Thank you for your comment!

Different countries have different rates of interest and inflation. Graham's framework may need to be adjusted accordingly.

Hi, thanks for the reply. However if I look at the S&P AA index for a 10 year corporate bond in Japan it is 0.34%, so lower than the american bond. So in the formula the % intrinsic value required would be even lower, therefore if I adjust it I would find even more stocks than those I have already found by not adjusting the settings and screening for defensive no?

Also, I understood from the FAQ that the bond rate used in the formula is 3.3% but the 10-year corporate bond appears to be 1.42% as of now, should I adjust myself the settings also for american stocks? Thanks

Dear rc2752,

Thank you for your comment!

Since inflation affects both the Size and Growth Graham ratings, the stocks may not even clear the qualitative ratings to qualify for a quantitative comparison against bond yields if the historical rates of inflation in the region have been very high.

You're right about the second point. Since interest rates fluctuate over time and across regions, Serenity only provides the percentages for each stock and the means of arriving at the acceptable values. The final assessment is left to the users themselves.

if I am not mistaken, for Japan I should adjust the asset size and sales by factors that the filter does not even allow given the yen/dollar exchange at 0.0093 and the filter goes up to 1000%?

Other than that historical inflation has been lower, so all the stocks that have made the cut when I simply clicked "defensive" they would still make the cut (and more), since the default cutoff was 33% growth on 10 years based on a 33% inflation. Given Japan has been on a deflation many years and inflation below 1% and many others in the past decade it adds up to less than 33. Hence, by leaving the value as such I have screened more stringently than necessary and not too loosely, confirm if correct.

Same thing for the corporate bond yield, if it's default set at 3.3%, then with a yield of less then a half I should have set the intrinsic value ratio to about 50% or such, so by not doing that I have filtered OUT more companies.

Hence this leads me back to the original point that in the Japan stock exchange there appear to be a lot more undervalued companies. Essentially if grasp the logic correctly, I might as well just filter with "defensive" well knowing that all those that pass the screening (and they are hundreds) have passed all the criteria (actually with an ever higher bar), and the only criteria I should verify manually at that point would be whether their assets are in excess of 50 million USD and sales above 500 USD, which I can do from the financial statements easily.

Please correct me if I applied the process wrongly.

I must point out - if the above is correct - that even after dropping out companies that do not meet the sales and asset criteria, but including for those that would make the cut thanks to the revised growth % and formula adjust for the bond rate, that the Japanese market for some reason would still appear to offer plenty of undervalued stocks most likely.

Also to confirm, with the bond interest rate of USA at 1.42%, even when I screen american stocks now I would need to set the Graham # % and intrinsic value % to approx 46% (following the calculation)?

Thanks!!

Dear rc2752,

Thank you for your comment!

All your points above appear to be valid. The exact numbers haven't been validated, but appear to be correct (apart from the Company Size values below).

Please note that you don't need to look at financial statements to check for Total Assets in excess of 250M USD (not 50M) or Sales in excess of 500M USD. Those figures are already given on the stock pages on Serenity.

The filters on the screeners are set to max out at 1,000% by design, since letting them go up to 10,000% would require them to have steps of 50% or render them equally unusable at steps of 5%.

But one can filter for higher values too using the Sort feature on the screener, especially since the Advanced Graham Screener allows listing of up to a 100 stocks at a time. The 100 filtered stocks can be sorted in order of Company Size by clicking on the required column headers.

Graham Resources