The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.

The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).

The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.

That probable victory has major implications for investors.

• For starters, let’s consider the big exporting companies. Such players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR: SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less prominent, as they won’t have such strong backing from the government bureaucracy. The construction companies – Komatsu Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),Sumitomo Realty & Development Co. Ltd. (OTC: SURDY) and the like – will do less well.
• On the other hand, domestic-oriented companies, particularly in consumer products, should benefit. Low-end consumers may do better than high-end, so we’ll look for basic goods.

The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well. Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable. How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go. Here are the seven ways to play Japan’s election (with one bonus pick for good measure):

• Kao Corp. (4452; OTC ADR: KCRPY) is a classic consumer-products company – kind of like a Japanese version of The Procter & Gamble Co. (NYSE: PG) here in the United States. Kao produces cosmetics, laundry and cleaning products, making it a domestically oriented company that should do well as Japan’s consumer spending improves. Stock stats: The company’s stock trades at 17 times earnings and yields 2.7%.

• Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces beer, soft drinks, food products, whiskey and pharmaceuticals. In addition to its strong position in Japan, Kirin is a major player in the East Asian market. Stock stats: P/E ratio 16; stock yields 1.6%.

• Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a nationwide convenience store chain that sells food, beverages and gaming software. Stock stats: P/E ratio 13; dividend yield 2.7%.

• QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise, salad dressing, egg products and health foods. Stock stats: P/E ratio 17; dividend yield 1.5%.

• Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces and sells flour, cooking oils and confectionary products. Stock stats: P/E ratio 19; dividend yield 2.4%

• Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY) is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It operates convenience stores, food stores and fast food restaurants.Stock stats: P/E ratio 22; dividend yield 2.5%.

• Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and sells prescription drugs and medical equipment in Japan and overseas. Stock stats: P/E ratio 19; dividend yield 4.2%.

Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15. 

Source: Eight Ways to Profit From Japan’s Game-Changing Election

Editor’s Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world’s financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold and specially designated “Alpha-Dog” stocks into high-income/high-return portfolios for subscribers. Hutchinson’s strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash – only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.To find out about this strategy – or Hutchinson’s new service, The Permanent Wealth Investor – please just click here.

So begins a letter from one of our more-dedicated readers.

In today’s markets, it is extremely difficult to find winners. With a market beset by soaring oil and energy prices, the forced liquidation of securities by large financial institutions that are quickly urged to comply with the U.S. Federal Reserve’s capitalization requirements and the rest of the market afraid of its own shadow, rumors proliferate and bear raids abound.

Stocks that already represent a fine value get hit nonetheless and become even deeper bargains. Yet, it is precisely in these circumstances, as the Chicago Board Options Exchange Volatility Index – usually referred to as the VIX Index – is regarded as a proxy for fear in the markets. The index is once again quickly approaching the July 2007, January and March 2008 spikes above 32 that marked the broader market’s tradable bottoms. We have to remain vigilant and look to scoop up bargains if this market ends up as a fire sale.

Enter Cummins Inc. (NYSE: CMI). This no-nonsense Midwest industrial company is almost 100 years old, has been trading publicly since 1947, and is best known as the maker of bulletproof diesel engines.

But the Columbus, Ind.-based company is actually much more. Indeed, in many ways it’s actually the ideal Money Morning/Money Map Report stock pick: It serves basic industries, is diversified globally and just boosted its dividend payout 40%.
Cummins does business in four areas:

• Diesel and natural-gas-powered engines (52% of the company’s overall revenue).
• Electric-power-generation systems distribution systems (19% of revenue).
• Power-generation systems (19% of revenue).
• Engine components (10% of revenue).

The company holds leadership positions in all of its product areas. All these lines are in the “sweet spot” of increasing growth rates and margins due to the specific reasons that differentiate them from the rest of the market.

Very importantly, Cummins enjoys strong, sustainable competitive advantages in every segment of its business. It has well-integrated product plans, focused on being the low-cost producer and developing strong distribution-and-servicing channels in all its markets across the globe.

That translates into consistent market-share dominance for most of its products. What’s more, even though a great proportion (about 45%) of Cummins’ sales come from the U.S. market, the huge spike in oil and gasoline prices has accelerated the U.S. migration into diesel engines, which are more- fuel efficient and have longer lives – and which is the company’s dominant product line.

Diesel engines already are in widespread use overseas, where Cummins derives the remaining 55% of its overall corporate revenue. The company is particularly strong in Europe (18% of sales), Asia/Australia (20%) and Mexico/Latin America (9%). Cummins can expect a big long-term growth boost from its power-generation business, where the company has a big advantage in such product areas as standby, mobile and distributed power generation. This business is growing quickly overseas, because of the inadequacies of the national electricity-distribution grids and the risks to interruption in many emerging economies.

With global growth across the world established solidly for the next two decades, and especially driven by the vast demands in China and India in power generation due to urbanization and industrialization, this business will be major growth driver for Cummins for years to come.

The company is very strong financially. Cummins has a market value of $13.4 billion. Last year it reported profits of $739 million on sales of $13.1 billion. Free cash flow was $1.23 billion. For all of 2008, Cummins is projecting that sales will advance 5% to $13.71 billion, while cash flow will increase 6% to $1.3 billion.

The input cost increase due to higher electricity and steel prices should pose no problem to Cummins’ margins, since its market dominance, cost leadership, and the scarcity of these products across the board gives this industrial heavyweight plenty of pricing power.

At Friday’s closing price of $65.95, Cummins’ shares were down 12% from their 52-week high of $75.09. But they’re 73% above their 12-month low of $38.11. However, there has been some recent weakness, induced by forced liquidations and unrelated factors to Cummins’ fundamentals. Ignore that as a negative: It actually only provides investors with an attractive buying opportunity. This opportunity is available to the very few, since the stock is under-covered by Wall Street, since it is boringly and consistently profitable.

Action to Take: BUY Cummins Inc. (CMI). Investors should rev up their purchases of this major maker of diesel engines and power-management systems.

[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with the newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that so far has covered Cisco Systems Inc. (CS), and ABB Ltd., ADR: ABB). Readers should feel free to write to us and suggest a stock they’d like to see analyzed.]

Source: Buy, Sell, or Hold: Cummins Inc.