Buffett's endorsement, are Japan's "five major trading companies" stocks already too expensive?

The stock prices of some Japanese trading companies are hovering at the highest valuation levels in 20 years, with investor hesitation rising over whether to continue chasing the gains triggered by Warren Buffett's investment five years ago.

On September 3rd, it was reported that although Berkshire Hathaway disclosed last week that it had increased its stake in Mitsubishi Corporation, potentially boosting market sentiment, the high stock prices have deterred ordinary investors from establishing long positions.

Mitsubishi Corporation's 12-month forward price-to-earnings ratio has reached its highest level since 2005, while Itochu Corporation's price-to-book ratio has hit a peak not seen since 2008. Hisashi Arakawa, head of Japanese equities at Aberdeen Investment, stated:

"Given the current valuation levels, now is not the right time to actively buy trading company stocks."

Notably, analysts warn that Trump's tariff policies, the strengthening yen, and falling commodity prices could all put pressure on the business of Japanese trading companies.

Valuation Levels Reach Multi-Year Highs

The valuation metrics of Japan's five major trading companies are generally at historical highs.

Mitsubishi Corporation's 12-month forward price-to-earnings ratio has reached its highest level since 2005, while Itochu Corporation's price-to-book ratio has set a new high since 2008. The Tokyo Stock Exchange's wholesale trade index, which covers Japan's five major import and export companies, has also hit a peak not seen in over a year.

The surge in valuation levels is closely related to the strong rally following Buffett's initial disclosure of holding shares in Japan's five major trading companies in 2020. Since then, the average stock prices of Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation have risen by 320%, far exceeding the performance of the Tokyo Stock Exchange index.

Although Berkshire Hathaway's disclosure of increasing its stake in Mitsubishi Corporation last week boosted market sentiment, investors remain cautious about continuing to buy at high levels. The current stock price levels leave ordinary investors in a dilemma: worried about missing out on further gains while unwilling to take risks at high levels.

Faced with high valuations, investors are beginning to adopt more cautious strategies. Although Arakawa from Aberdeen Investment established a position in Itochu in April, he stated that there are no plans for further increases at current levels.

However, not all trading company stocks are in a high valuation state. Sumitomo Corporation's forward price-to-earnings ratio has dropped from 59 times in 2020 to 8.9 times, providing opportunities for investors still looking to enter the sector.

Slowing Profit Growth Becomes a Concern

In addition to valuation concerns, the Japanese trading company sector also faces challenges of slowing profit growth.

Naoki Fujiwara, senior fund manager at Shinkin Asset Management, pointed out, "When Buffett initially bought in, these stocks gave the impression of being undervalued, but that is no longer the case. Earnings need to keep up; otherwise, stock prices will remain top-heavy."

Analysts warn that Trump's tariff policies could impact the export profits of these conglomerates.

At the same time, the further strengthening of the yen and falling commodity prices could also put pressure on the trading companies' commodity businesses. The uncertainty of these external factors has further intensified investors' concerns about the current high valuation levels Despite Buffett's long-term investment commitment providing some support for these stocks, it remains uncertain whether trading company stocks can maintain their current valuation levels amid multiple intertwined risk factors. Rieko Otsuka, a strategist at MCP Asset Management Japan, stated:

"As Buffett continues to indicate that his investment in trading companies is of a long-term nature and that allocations are steadily increasing, this will provide downside support. However, with resource prices, exchange rates, and tariff policies becoming increasingly uncertain, it is difficult to find reasons to continue increasing holdings in trading company stocks at the already elevated levels."