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The last two bargain stocks left in Japan

Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.

Being one of only two stocks to have made losses in a bull market is like watching everyone go out to play while you've been grounded. Fanuc and Nikon are the wallflowers of the blue-chip Topix 100. But with the gain in the Japanese index now one-third already this year, and the index's forward price/earnings ratio climbing 12 per cent just this month, then stocks that have not rocketed should interest bargain hunters.

Of course, neither Fanuc or Nikon have been overlooked simply because of the stampede to buy the easy reflationary bets like brokers and property stocks. Nikon's shareholders were upset by a February profits warning that lowered forecast net income by a third owing to a poor camera market. It will not help either that its second biggest unit, after imaging goods, includes chipmaking equipment where global sales fell a sixth last year, according to Gartner. And Fanuc this week said first-half operating profits from its factory robots would fall two-fifths year-on-year. With that in mind Fanuc's loss of 9 per cent and Nikon's of 16 per cent, look mild.

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So where might hidden value lie? Nikon is the tougher case to argue. Chipmakers are careful about adding supply, while digital camera sales, even given Nikon's high-end dominance, look dire in the face of smartphone competition. Perhaps the company will find a reason to be upbeat when it reports next week. But Fanuc's sour outlook is at odds with its customers: Japan's carmakers have decent investment plans and Fanuc gets about three-fifths of sales from that sector. There is also the yen. Fanuc's operating profits move by Y2.5-billion ($25.8-million) for every Y1 move in dollar-yen, Credit Suisse says, and Fanuc is assuming Y90 – a level not seen in three months.

For Japan fans, there are far easier bets than these two. But most of the easy money has been made by now. Time to start looking at the laggards.

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