June 18 (Bloomberg) -- Shares of Japan’s smaller companies will continue to outperform as recent analyst departures creates information gaps fund managers can exploit, said Tomochika Kitaoka, chief strategist at Mizuho Securities Co.

A three-year bear market in “small cap” stocks, which has claimed specialists including JPMorgan Chase & Co.’s Go Saito and Laurent Halmos from CLSA Ltd., has helped attract value fund managers looking to invest in stocks that may now be overlooked, the strategist said. Three quarters of the companies in the Jasdaq stock index of smaller companies trade at less than book value, compared with only 17 percent of companies in the Topix Core 30 Index of the nation’s largest stocks.

“Information is now scarce, so in that sense there are very good opportunities,” Kitaoka, who has been with the brokerage unit of Japan’s second-largest lender for two years, said in an interview in Tokyo yesterday. “We see a modest recovery occurring in the corporate earnings cycle, so the valuation gap between large and small cap stocks should get smaller and smaller.”

The Jasdaq has climbed 16 percent since the start of May through yesterday, compared with a 6.7 percent advance by the Topix Core 30. Since Japan’s market bottomed in March the largest factor determining stock performance has been the price- to-book ratio, Kitaoka said, with lower-valued companies posting the biggest gains.

Three of the top 10-ranked small-cap analysts in a 2007 Nikkei Inc. survey have quit or been fired from brokerages. Shinko Securities Co.’s Hirotaka Tosaki, Takashi Sawada at Mitsubishi UFJ Securities Co. and JPMorgan’s Saito have all left their positions in the last two years.

Analysts Depart

The market for smaller companies had trailed large-cap rivals since January 2006 when executives of Internet provider Livedoor Co. were arrested for fabricating profits, sparking an exodus of investors worried about accounting problems. The Jasdaq plunged 74 percent from its January 2006 high to a nadir in March, compared with a 58 percent slide by the broad Topix index in the same period.

Mizuho analyst Ken Murakoshi, ranked sixth in Nikkei’s 2009 small-cap poll, has assigned “strong buy” ratings to Meiko Electronics Co., a maker of printed circuit boards and Dai-Ichi Seiko Co., a maker of car electronics. Meiko shares trade at 0.8 times book value even after almost doubling in the past three months.

Kitaoka, formerly a strategist with Nomura Holdings Inc., predicts the Topix could climb to 1,400 by the end of this year as optimism for an economic recovery gains momentum. The stock gauge fell 1.7 percent to 907.44 as of 12:39 p.m. Tokyo time.

Government figures show that Japan’s industrial production improved in March and April, while the Bank of Japan said this week the world’s second-largest economy has “begun to stop worsening.”

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.

Last Updated: June 17, 2009 23:40 EDT