Buffett’s endorsement: Are the stocks of Japan’s “five major trading houses” already too expensive?

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

On September 3, it was reported that although Berkshire Hathaway's disclosure last week of an increased stake in Mitsubishi Corporation may boost market sentiment, the high stock prices are discouraging ordinary investors from taking long positions.

Mitsubishi Corporation’s 12-month forward P/E ratio has reached its highest level since 2005, while Itochu Corporation’s P/B ratio has hit its highest level since 2008. Hisashi Arakawa, Head of Japanese Equities at Aberdeen Investments, said:

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

It is worth noting that analysts warn that Trump’s tariff policy, a strengthening yen, and falling commodity prices could all put pressure on Japanese trading companies' businesses.

Valuation Levels at Multi-Year Highs

Valuation metrics for Japan’s five largest trading companies are generally at historical highs.

Mitsubishi Corporation’s 12-month forward P/E has reached its highest level since 2005, and Itochu’s P/B ratio is at a new high since 2008. The TOPIX Wholesale Trade Index, covering Japan’s five largest import and export companies, also saw forward P/E hit its highest in over a year.

This surge in valuation is closely tied to the strong rally that followed Buffett’s first disclosure in 2020 of his holdings in Japan’s five big trading companies. Since then, the shares of Itochu, Marubeni, Mitsubishi Corporation, Mitsui & Co., and Sumitomo have risen by an average of 320%, far outperforming the TOPIX index.

Although Berkshire Hathaway’s disclosure last week of increased holdings in Mitsubishi lifted market sentiment, investors remain cautious about continuing to buy at these high levels. Current stock prices have put ordinary investors in a dilemma: they fear missing out on further gains but are unwilling to take risks at these high levels.

Facing high valuations, investors are beginning to adopt a more cautious strategy. While Arakawa of Aberdeen Investments established a position in Itochu in April, he indicated he has no plans to increase holdings at current levels.

However, not all trading company stocks are at high valuations. Sumitomo Corporation's forward P/E has dropped from 59 times in 2020 to 8.9 times, providing an opportunity for investors still looking to enter the sector.

Slowing Profit Growth a Concern

In addition to valuation concerns, Japan's trading company sector also faces the challenge of slowing profit growth.

Naoki Fujiwara, Senior Fund Manager at Shinkin Asset Management, pointed out, "When Buffett initially bought in, these stocks appeared undervalued, but that is no longer the case. Profits need to keep pace, otherwise stock prices will remain top heavy."

Analysts warn that Trump’s tariff policy could impact the export business profits of these integrated trading companies.

Meanwhile, further strengthening of the yen and falling commodity prices could also pressure trading companies’ commodity businesses. The uncertainty from these external factors has further heightened investor concern over current high valuation levels.

Although Buffett’s long-term investment commitment offers some support to these stocks, it remains uncertain whether trading company stocks can maintain current valuations with multiple risk factors at play. Rieko Otsuka, strategist at MCP Asset Management Japan, said:

"As Buffett continues to indicate his trading company investments are long-term and positions keep growing, this will provide downside support. But with resource prices, exchange rates, and tariff policies all becoming increasingly uncertain, it’s hard to find a reason to keep increasing positions in trading company stocks at these already high levels."

Risk Disclosure and DisclaimerThe market has risks, investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate to their own circumstances. Investing based on this information is at your own risk. ```