The World Bank estimates that it could take up to five years for Japan to repair damage inflicted by the devastating earthquake and tsunami. Japanese officials put the damage estimate at up to $309 billion ... or four times the cost of Hurricane Katrina in the US. Of course, it’s impossible to put a price on the tragic human toll inflicted.¹

But the Japanese are very experienced at recovery and their society is a model of resiliency … they will rebuild just as New Orleans has.

Japan’s businesses are already coping with plant closures and widespread power interruptions as the disasters cut about 11 percent of Japan’s power-generating capacity.²

The Japanese auto industry has certainly felt the impact. Toyota, the world’s largest car maker, stopped all domestic production at 18 auto plants until March 28 and Honda wasn’t able to fully restart production until April 3. Honda was also forced to scale back production at plants in North America, India, Turkey and the Philippines due to component shortages that are sourced in Japan.³

The Weakest Link?

The disaster in Japan exposed a weak link in the global supply chain for everything from car parts to electronics manufactured by Japan Inc. … at least that’s what some investors thought.

The result, the share prices of many companies around the world, including US auto parts and technology stocks, tumbled lower in a knee-jerk reaction. We think the indiscriminant selling has been overdone ... and in some cases, is totally unwarranted ... therein lies opportunity for alert investors.

US auto suppliers, including TRW Automotive (NYSE:TRW), Magna International (NYSE:MGA) and Harman International (NYSE:HAR) have all been impacted to some degree — and in some cases unjustly — in our view.

Magna is a great case in point. This diversified global auto supplier is on our Banyan Buy List because we believe it’s undervalued, with terrific growth prospects, particularly in overseas markets.

Magna is one of a small handful of auto suppliers that can do it all. Instead of selling crates full of individual components for automakers to assemble, Magna can engineer, manufacture and deliver completely assembled turn-key automotive systems. In fact, about $1,200 worth of Magna built components can be found in every car sold worldwide!

Financially, the company generates lots of cash flow and has zero debt net of its $2 billion in cash on the balance sheet. Profits are projected to grow about 10 percent this year to $4.76 per share according to estimates. At a price of $49.70 yesterday, Magna trades at just 10 times this year’s likely earnings.⁴

When investors reacted ... or overreacted, in our view ... to the news of auto supply chain disruptions in Japan, Magna’s share price was knocked down along with the rest. And at first glance, you might think it’s warranted.

Waiting for the ‘Fat Pitch’

But taking a closer look at Magna, as we have, you’ll find that the company has diverse operations, with 256 manufacturing plants in 26 countries around the world. And Magna’s total exposure in Japan is limited to just two manufacturing facilities and four sales and engineering offices.⁵

The company has only 180 employees in Japan, out of a global workforce of more than 96,000. Still, Magna’s share price has tumbled nearly 20 percent this year.⁶ While the natural disasters in Japan aren’t totally to blame here, the overreaction has certainly weighed on Magna’s shares.

That’s exactly why we view this as a great buying opportunity.

This is just one example of the opportunistic investment approach we follow at Banyan Partners. If you’ve done your homework, and have confidence in your analysis, then you can afford to be patient ... and wait for the “fat pitch” to hit, as Warren Buffett has said.

The impact of last year’s oil spill in the Gulf of Mexico was another good example. Many oil service stocks were hammered, temporarily, in the aftermath.

But today, with crude oil prices moving toward $110 a barrel, many of these same stocks have moved substantially higher in price from their panic lows one year ago.

The financial media does a great job spreading fear with gloomy headlines and this can lead to downside corrections in the markets, as well as individual stocks. But if you’re willing to do your homework and be a patient investor, sometimes the worst headlines can lead to the best longer-term investment opportunities.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

Banyan Partners and the advisory accounts that we manage may have option positions and/or long or short positions in the securities mentioned in this report and may purchase or sell such securities without notice. This newsletter is not a complete analysis of every material fact with respect to any company, industry or security mentioned in this report. Please contact us for additional information.

The securities discussed herein may not be suitable for all investors. You must make your own decisions based on your specific investment objectives, risk tolerance, and financial circumstances and should always obtain current information and perform due diligence before you invest. Every security carries risk and the value of the securities mentioned in this report may be adversely affected by commodities prices, exchange rates, interest rates or other factors. Past performance is no guarantee of future results.

¹ Bloomberg: Tokyo Steel, Fuji Heavy Face Shutdowns as Blackouts Sap Japan's GDP Growth, 3/25/11
² Ibid.
³ Bloomberg: Honda to Cut India Car Output Next Month on Parts Shortages, 4/5/11
⁴ Value Line Investment Survey, 3/25/11
⁵ Magna International of America Inc., 3/18/11
⁶ Ibid.