Two U.S. Companies That Will Help Japan

The triple whammy of a magnitude 9.0 earthquake, resulting tsunami and ongoing nuclear power plant crisis has done more than engage the world in humanitarian aid for the Japanese - it has also tuned investors in to a stock market that is likely ripe with opportunity.

The Japanese will rebuild, and the nation will get back on its feet. The Japanese economy will get a lift from its massive rebuilding, but don't make the mistake of thinking that the rebuild will negate the economic loss from the earthquake. The human and emotional loss aside, based purely on numbers I believe that Japan will have a net 'loss' because of the earthquake.

But there are companies that will have a net gain. And as a point of fact, Japan's stock market was already deeply discounted before the earthquake. The post-event selloff is most likely a great buying opportunity for investors who have confidence, as I do, that Japan will emerge from this and prosper in the near future.

I'll talk more about Japan specific investments in tomorrow's letter, today I want to talk about two American firms that are compelling investments in light of recent events in Japan.

Two things (note that this is, obviously, not the entire list of what needs to happen) need to happen in Japan - hazardous waste must be cleaned up, and the people need to be fed. That's where Clean Harbors CLH and Smithfield Foods SFD come into play.

The first company cleans things up, a service Japan could clearly use, and the second company is a meat producer. The Japanese are extremely food conscious, and will likely seek safe, radiation free, food from abroad if domestic producers have contamination concerns.

Despite its name, Clean Harbors goes beyond just restoring waterways. Founded in 1980 to clean tanks, its services now include site decontamination and waste disposal. The company's 50,000 customers are mostly in North America, but it also has a strong international presence in Asia.

The company played a substantial role in the cleanup efforts that followed Hurricane Katrina and the BP oil spill in the Gulf of Mexico. And recently, CEO Alan McKim disclosed to CNBC that Clean Harbors has been contacted to become involved in Japan's cleanup process.

Clean Harbors has a $2.6 billion market cap, and has been a strong performer in 2011, rising around 15 percent year to date. Over the past five years, Clean Harbors has rallied more than 200 percent.

The company's 2010 revenues were boosted by the BP spill - top line growth was 61 percent, to $1.73 billion, and net income more than tripled to $130.5 million, or $4.93 per diluted share.

Exactly how much business the company could get from Japan remains to be seen, and probably won't be known until work actually begins in earnest. I suspect that any effort to put estimates on the clean up 'tab' at this point are rudimentary at best given the extent of damage.

With a successful track record dealing with disasters, I believe Clean Harbors is a stock that will continue to move higher as the company's services are needed in Japan.

***Now, let's change gears and discuss Smithfield Foods, the world's leading pork producer. Right now, the Japanese are struggling just to put enough food on store shelves.  Reports are surfacing about radiation being found in milk, fresh vegetables, even the Tokyo drinking water. U.S. meat producers are going to be tapped to increase exports to Japan, and Smithfield's food is a likely beneficiary.

Japan is already one of Smithfield's top foreign markets, accounting for 43 percent of the company's export revenue and one-quarter of its export volume. Clearly, the company has a healthy presence in the country.

Shares of Smithfield Foods, which has a market cap of $3.7 billion, are up 10 percent in 2011. The stock has yet to regain its post recession highs - in my mind this is compelling simply because so many other small caps have rallied so far so fast and valuations are getting a little lofty.

The stock finished calendar 2010 with a 36 percent gain after two years sustaining losses while restructuring, Smithfield is expected to return to profitability in its fiscal year that ends in April, with earnings estimated at $2.38 per share by analysts surveyed by Thomson Reuters.

With a current consensus price target of $26, Smithfield Foods' stock still has room to the upside.  I believe this is a value play, even though the company's return to profitability, and solid revenue growth potential, suggests that it is a growth stock. The stock trades with a current year P/E of 9.5.

Both of these stocks are compelling right now with estimates of Japan's rebuilding costs hovering around $300 billion. This work will take time, maybe five years or longer - so the longer term investment based on Japan's recovery will be Clean Harbors.

Smithfield Foods should see a bump in revenues over the next six months to a year, but unless the food supply chain in Japan fundamentally changes, the company's exports could revert back to current levels. I already like Smithfield Foods as a 'stand alone' investment, but would suggest investors who jump in for the Japan angle take a closer look at quarterly exports to Japan, and monitor this metric on an ongoing forward basis.

As we've seen in the recession here in the U.S, small-cap stocks are leading the way to recovery. They'll do the same in Japan.

Further Reading: If you think my analysis of the above opportunities is spot on, you're likely to find a lot more profit ideas in my advisory service Small Cap Investor PRO. Get started with a special report on five of my best bargain-priced small-cap investments here.