Japan's GDP Rises For 7th Straight Quarter: 5 Top-Rated Picks

Japan's economy has expanded for the seventh successive quarter, marking its longest unbroken phase of economic growth since 2001. Additionally, the country’s markets have been mopping up impressive gains with the benchmark Nikkei 225 up 15.3% year to date. This is largely a product of strong corporate earnings released recently.

Adding to investor optimism has been prime minister Abe’s resounding victory in snap elections held recently. This development bodes particularly well for the country’s exporters. Taken together, these factors imply that investing in Japan’s stocks makes good sense at this point.

Exports Boost GDP in Third Quarter

Japan’s GDP increased at an annualized pace of 1.4% over the third quarter, coming in above most median estimates. This expansion follows a revised 2.6% annualized expansion in the second quarter.

With this increase, the Japanese economy has now expanded for a seventh successive quarter in succession. This marks the longest unbroken phase of growth since the eight quarters between April to June 1999 and January to March 2001.

Powering the third-quarter increase in GDP was a positive trade balance, which represents the difference between exports and imports. This factor alone added 0.5% to overall growth numbers.

The only cause for concern was a 0.5% dip in private consumption, which makes up the lion’s share of Japan’s GDP. However, such weakness could only be temporary. This is because as Japan nears full employment, a pickup in consumption becomes inevitable in the near future.

Strong Earnings Boost Nikkei to Record Level

On Nov 7, the Nikkei jumped to its highest level in 26 years on the back of strong earnings results. According to Daiwa Securities, pretax profit levels for the April to September period of nearly 70% of Japan’s top 200 companies which had released earnings numbers exceeded estimates by around 13%.

Additionally, a number of Japanese firms upwardly revised their earnings estimates for the business year through next March. If such positive revisions continue, the Nikkei Stock Average could surge to 24,000 in the near term, per Daiwa Securities Group. (Read: 5 Reasons to Buy Japan ETFs)

Abe’s Victory Adds to Optimism

Meanwhile, last month, prime minister Shinzo Abe’s Liberal Democratic Party (LDP) secured a thumping victory in snap elections. Financial markets cheered the victory of Japan’s pro-business prime minister. The Nikkei Stock Average went up 1.1% to 21,695 on Oct 23, its highest level in two decades.

Japanese Prime Minister Shinzo Abe’s sweeping election victory paves the way for ultra-easy monetary policies that have driven stocks to the highest level in two decades. Consequently, the yen fell to its lowest level against the dollar since July, a development which bodes well for Japan’s exporters. (Read: 4 Top Japan Stocks to Buy on Abe's Overwhelming Win)

Our Choices

Japan’s latest GDP reading is fresh proof that the country’s economy is enjoying a particularly strong phase. Strong earnings performances have been boosting its benchmark index appreciably higher recently. Additionally, Abe’s resounding victory means that exporters may continue to benefit from a soft yen.

Adding Japan’s stocks to your portfolio looks like a smart move at this point. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alps Electric Co., Ltd. (OTC:APELY) is a Japan-based company mainly engaged in the manufacture and sale of electronic components and audio equipment.

Alps Electric has a VGM Score of A. The company’s projected growth rate for the current year is 51.2%. The Zacks Consensus Estimate for the current year has improved by 6.4% over the last 30 days. The stock has gained 35% year to date.

Canon Inc. (NYSE:CAJ) is an industry leader in professional and consumer imaging equipment and information systems.

Canon has a VGM Score of A. The company’s projected growth rate for the current year is 49.9%.The Zacks Consensus Estimate for the current year has improved by 20.3% over the last 30 days. The stock has gained 36.3% year to date.

Komatsu Ltd. (OTC:KMTUY) is the world's second largest manufacturer of earthmoving and construction machines. The company is headquartered in Tokyo.

Komatsu a VGM Score of B. The company has expected earnings growth of 42.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 16.6% over the last 30 days. The stock has gained 44.6% year to date.

Tokyo Electron Limited (OTC:TOELY) is a company primarily engaged in the manufacture and sale of electronic products for industrial uses.

Tokyo Electron has a VGM Score of B. The company has expected earnings growth of 62.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.3% over the last 30 days. The stock has gained 108.6% year to date.

Seiko Epson Corporation (OTC:SEKEY) is engaged in the development, manufacturing, sales, marketing and servicing of information-related equipment, electronic devices, precision products and other products.

Seiko Epson has a VGM Score of B. The company has expected earnings growth of 33.9% for the current year. The stock has gained 9.2% year to date.

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