It is getting warmer in New York, but the Nikkei Average in Japanese stock market is not feeling the NYC heat compared to last year. Do you wonder which stock to buy under these circumstances if you are into Japanese stocks? Is it wise to look into Sony (SNE) in 2016 and beyond? 

After researching 30 companies which constitute TOPIX CORE 30, and conducting the CAPM theory, we selected three companies that stood out from the bunch and then conduct an analysis on each of the three selected stocks and conclude with an investing strategy.

 CAPM Theory Overview

As I have been covering in our wealth management classes, the capital asset pricing model (CAPM) is one way to determine the quality of a stock. It was the work of financial economist William Sharpe, set out in his 1970 book “Portfolio Theory And Capital Markets.” It helps investors to calculate what return on investment we should expect. Here is the formula.

E(Ri) = Rf + { E(Rm) – Rf } × βi

Date: 01/01/2010 ～ 04/01/2016

E(Ri):an expected rate of return

Rf: rate of risk-free asset (10-year Japanese government bond)

E(Rm): rate of return in the whole market (Nikkei average)

βi = Cov(Ri, Rm) / σ^2m

Calculating the data from 01/01/2010 to 04/01/2016, using a 10-year Japanese government bond as a risk-free asset and Nikkei average as a rate of return in the whole market, we get the following results:

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CAPM Theory Calculation - Japanese & Sony stocks 2016

The larger the number is, the more return we could expect.

The table shows that the highest expected rate of return is Nomura Holdings Inc. (NMR) at 0.8489%. The second is SONY Group at 0.8355% and the third is Mitsubishi UFJ Financial Group Inc at 0.8228%.

Since Sony is expanding in our favorite area of Virtual Reality (VR) we'll focus on Sony stocks 2016 today.

Sony Stocks 2016 - Overview

SONY Group is a major equipment manufacture company and has a good reputation globally. Sony Corporation symbol on Tokyo Stock Exchange, TSE,  is 6758. On New York Stock Exchange, NYSE, it is listed as SNE. It has been focusing on image sensors, games, music and movies recently. Its profit recovered from deficit by review of business and restructuring, although the deficit has continued. More recovery is expected.

Fundamentals

・2015 was the first time that SONY Group released a positive net income in three years

・SONY will release Playstation VR in Octorber 2016. Playstation VR is a virtual reality headset and is said to be cheaper than products of competitors such as Oculus. The VR market is expected to expand in the next ten years.

Technicals

No matter what you look into to invest, you always need to combine the fundamentals with technical analysis to get a better idea of your entry levels and setting your targets.

Big Picture Monthly Chart: On TSE, Sony stock  prices dropped after reaching a high of 3880, but could not reach inside the Ichimoku cloud. It could be a bullish signal if the Ichimoku holds as a support. Keep in mind that 3175 and 2408 are 23％  and 50％ Fibonnaci retracement levels respectively. Pivot: 2920

Sony Stocks 2016 - TSE Monthly Chart

Daily Chart Market Sentiment: For the daily chart, let's look at the prices of Sony stocks on NYSE. Note that there is a huge gap between the stock prices on this chart which could be attributed to time difference between Japan and the US. The prices are testing the resistance at 28. A failure to break above this level could form a Double Top reversal pattern, supported by the neckline at 23.60.

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Sony stocks 2016 - NYSE Daily chart

Market sentiment on the TSE and NYSE is pretty much the same. Prices have broken above the Ichimoku cloud which could be a signal of a shift in the market sentiment. Next resistance is set at 3,400 on TSE, and 30 on NYSE.

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sony stocks 2016 - TSE Daily Chart

Sony Stocks 2016 - Investing Strategy

Overall, Sony is one of the hottest stocks in the Japanese markets. Its profit has recovered over the past few months and more recovery is expected. Sony's expected rate of return calculated by CAPM is larger than its competition in Japan. As Sony leaves most of the bad news behind, and heads into some important catalysts, it is likely that a potential pull-back will provide an especially good opportunity to buy its stocks. The fact that the prices are above the Ichimoku cloud, could back our scenario as well.