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Weekend Edition

A whole market at a 30% discount... if you act quickly
Saturday, March 26, 2011

When the Japanese markets plunged following the earthquake, Steve Sjuggerud immediately recognized the buying opportunity... And he pounded the table. Buying at the point of maximum pessimism is a sure sign you're buying right. Here's what he wrote in the March 16 DailyWealth:
[Japanese stocks are] even cheaper now... Over two days, Japan's TOPIX (a broad stock market index) fell more than it ever has since its inception in 1949.
People are selling first and asking questions later. Japanese stocks as a whole are trading at just 1.06 times book value. (Compare that to the Dow, which goes for 2.75 times book.)
Small-cap Japanese stocks are trading at just 0.7 times book value – or a 30% discount to book value – and 0.34 times sales. This is off-the-charts cheap. – Steve Sjuggerud, March 16, DailyWealth
Japan's Nikkei index is up nearly 10% since that essay ran.
Steve's thesis is simple, "People have given up on Japanese stocks, more so than any other developed country I've seen in my entire career."
The worst-case scenario, Steve argues, is a large swath of Japanese land will be uninhabitable, but the business of the rest of Japan will go on. Japan stocks are record-cheap. And Steve's "incredibly optimistic." He believes you can make "hundreds of percent" buying Japan today.
The Japanese market is at record-cheap valuations. In particular, Steve says one sector of Japanese stocks is "the best value in the world... and one of the best values you will ever see."
This week, the richest investor in the world sided with Steve. On a visit to a South Korean factory, Warren Buffett said he's bullish on Japan... "It will take some time to rebuild, but it will not change the economic future of Japan," Buffett said. "If I owned Japanese stocks, I would certainly not be selling them."
Buffett, who's seen many economic crises, recognizes the opportunity following panicked selling. "Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception," he said.
Even perma-bear Marc Faber is bullish on Japan. Faber, editor of the Gloom, Boom & Doom Report, said the Japanese market selloff created a "lifetime buying opportunity."
It's impossible to call the exact bottom in a market. And Japanese stocks could easily sell off another 10%. But buying today should set you up for 100%-200% gains over several years. (Both Sjuggerud and Faber forecast triple-digit gains.)
In his latest True Wealth issue, Steve showed readers the Japan idea he calls "one of the greatest investing values I have ever seen in my investing lifetime." Learn more about True Wealth here.
Another winner from Japan's nuclear meltdown will be natural gas.
The market agrees... Since the Japan disaster, uranium prices have dropped 30%. Natural gas prices are up around 10%. And officials from countries including China and Germany have pledged to review their nuclear strategies. Also, utility companies are considering using natural gas as a source of energy (potentially replacing coal and nuclear). They've traditionally been wary due to gas' volatility. According to John Rowe, chairman of Exelon – the biggest nuclear utility in the U.S. – things may change...
Rowe said building new nuclear plants is prohibitively expensive. And the existing plants (the U.S.'s 104 nuclear reactors contribute 23% of the nation's electricity) are tangled in bureaucratic tape... Twenty reactors have applications pending with regulators to extend the plants' operating lives by up to two decades, according to Bloomberg. And the government isn't helping...
"We are likely to do to nuclear licensing what we did to offshore permitting," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. "We will delay and stall."
As for coal... tight carbon emissions regulations from the Environmental Protection Agency (EPA) would require large investments to scrub emissions from coal-fired plants. In other words... natural gas is looking better and better. Or as Rowe puts it, "natural gas is queen."
In addition to environmental pressures, the demand picture looks good. From 1999 to 2009, natural gas was rarely cheaper than coal. But coal has been soaring. And in late 2010, gas became cheaper than coal (and remains cheaper today). Plus, China and India will consume more and more of the world's coal to meet their energy needs. (The emerging markets aren't worried about dirty emissions.)
And the supply side is bullish for natural gas. At current prices, it costs more to produce gas than you can make selling it. In his DailyWealth essay titled "A Once-a-Decade, 1,200% Trade Is Setting Up Again," Matt Badiali discussed why Rick Rule, one of the best resource investors we know, is buying natural gas. From that essay:
Natural gas prices are so low – under $4 per thousand cubic feet (mcf) – it costs more to produce gas now than you can get for selling it. Most natural gas producers need $4.50-plus gas prices to break even. And most of the big, harder-to-drill shale plays need $5-plus. Natural gas producers can't keep operating like this for long. We're already seeing production shut down.
Take ConocoPhillips, the third-largest natural gas producer in Canada, for example. Conoco just cancelled new natural gas wells. It will spend the money on oil sands projects instead. In addition, it laid off 80 employees in the natural gas section and shifted others to oil sands work. – Matt Badiali, March 17, DailyWealth
In his latest S&A Resource Report issue, Badiali told readers the best way to profit from natural gas today. He recommended four small-cap companies with super-cheap reserves. As natural gas demand increases, pushing gas prices between $6 and $8, these companies will soar. To sign up, click here...
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