The Hennessy Japan Small Cap Fund (Trades, Portfolio) disclosed its first-quarter portfolio late last week.
Part of California-based Hennessy Advisors, the fund is managed by Tadahiro Fujimura and Tetsuya Hirano. Focusing on sustainable growth while limiting downside, the portfolio managers invest in a concentrated number of growth-oriented, small-cap Japanese companies that have a strong balance sheet, a durable competitive advantage, a high return on equity, above-average earnings growth and strong cash flow generation.
Adhering to these criteria, the fund established two new positions during the three months ended Jan. 31, sold out of one stock and added to or reduced a slew of other existing holdings. Among its most notable trades were new positions in Rengo Co. Ltd. (TSE:3941, Financial) and Creek & River Co. Ltd. (TSE:4763, Financial) and reductions in the Nojima Co. Ltd. (TSE:7419, Financial), Pacific Industrial Co. Ltd. (TSE:7250, Financial) and Hito-Communications Holdings Inc. (TSE:4433, Financial) holdings.
Rengo
Hennessy Japan invested in 111,900 shares of Rengo (TSE:3941, Financial), allocating 1.08% of the equity portfolio to the holding. The stock traded for an average price or 845.56 yen ($7.73) per share during the quarter.
The Japanese company, which manufactures packaging products like paperboard, corrugated boxes, cellophane and plastic and paper container bags, has a market cap of 228.77 billion yen; its shares closed at 924 yen on Friday with a price-earnings ratio of 8.85, a price-book ratio of 0.76 and a price-sales ratio of 0.33.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past performance and future earnings projections.
GuruFocus rated Rengo's financial strength 5 out of 10. Although it has a comfortable level of interest coverage, the Altman Z-Score of 1.55 warns the company could be at risk of going bankrupt if it does not improve its liquidity. It also is efficiently creating value since the return on invested capital significantly surpasses the weighted average cost of capital.
The company's profitability fared a bit better with a 6 out of 10 rating, driven by an expanding operating margin and a return on equity that outperforms over half of its competitors. Rengo also has a moderate Piotroski F-Score of 4, which indicates business conditions are stable, but the predictability rank of one out of five stars is on watch as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
The Small Cap Fund holds 0.05% of Rengo's outstanding shares.
Creek & River
The Japan Small Cap Fund picked up 84,000 shares of Creek & River (TSE:4763, Financial), dedicating 1.07% of the equity portfolio to the position. Shares traded for an average price of 1,079.05 yen each during the quarter.
Headquartered in Tokyo, the business services company, which provides consulting, outsourcing, production and professional agent services for video game and multimedia creators, has a market cap of 35.06 billion yen; its shares closed at 1,573 yen on Friday with a price-earnings ratio of 21.8, a price-book ratio of 3.58and a price-sales ratio of 0.97.
According to the GF Value Line, the stock is modestly overvalued currently.
Creek & River's financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company has a robust Altman Z-Score of 6.2 that indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, indicating good value creation.
The company is also supported by operating margin expansion, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Consistent earnings and revenue growth also contributed to a 3.5-star predictability rank. GuruFocus says companies with this rank return, on average, 9.3% annually.
The fund holds 0.38% of Creek & River's outstanding shares.
Nojima
With an impact of -0.9% on the equity portofolio, Hennessy reduced its Nojima (TSE:7419, Financial) position by 44.14%, selling 25,600 shares. During the quarter, the stock traded for an average per-share price of 2,817.89 yen.
The fund now holds 32,400 shares total, which represent 0.96% of the equity portfolio. GuruFocus estimates it has gained 55.55% on the investment since the fourth quarter of 2019.
The company, which manufactures and retails consumer electronics like TVs, audio equipment, portable music players, personal computers, printers and digital cameras, has a market cap of 140.47 billion market cap; its shares closed at 2,837 yen on Friday with a price-earnings ratio of 3.11, a price-book ratio of 1.05 and a price-sales ratio of 0.29.
Based on the GF Value Line, the stock appears to be modestly overvalued currently.
The valuation rank of 5 out of 10 is more supportive of fair valuation, however, since the price-earnings and price-book ratios are approaching multiyear lows.
GuruFocus rated Nojima's financial strength 6 out of 10 on the back of comfortable interest coverage and a high Altman Z-Score of 3.19. The ROIC also significantly surpasses the WACC, meaning it is creating value for shareholders.
The company's profitability scored a 7 out of 10 rating. In addition to an expanding operating margin, Nojima is supported by strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Although revenue per share has declined over the past year, it still has a one-star predictability rank.
The fund holds 0.07% of the company's outstanding shares.
Pacific Industrial
Impacting the equity portfolio by -0.72%, the Japan Small Cap Fund trimmed its Pacific Industrial (TSE:7250, Financial) holding by 31.1%, selling 57,000 shares. The stock traded for an average price of 1,097.03 yen per share during the quarter.
The fund now holds 126,300 shares total, accounting for 1.54% of the equity portfolio. GuruFocus data shows it has lost an estimated 7.66% on the investment since the fourth quarter of 2017.
The auto parts manufacturer, whose products include tire pressure and valve parts, stamping and molding parts, control devices and IC modules, has a market cap of 74.29 billion market cap; its shares closed at 1,229 yen on Friday with a price-earnings ratio of 12.52, a price-book ratio of 0.74 and a price-sales ratio of 0.5.
The GF Value Line indicates the stock is modestly undervalued currently.
Pacific Industrial's financial strength was rated 5 out of 10 by GuruFocus. Although the company has adequate interest coverage, the Altman Z-Score of 1.87 indicates it is under some pressure. In addition, it is struggling to create value since the WACC surpasses the ROIC.
The company's profitability scored a 6 out of 10 rating. Although the operating margin is in decline, Pacific Industrial is supported by returns that outperform over half of its industry peers. The low Piotroski F-Score of 2, however, indicates it has poor business conditions. The one-star predictability rank is also on watch as a result of revenue per share declining over the past year.
The fund holds 0.21% of Pacific Industrial's outstanding shares.
Hito-Communications
Hennessy curbed its Hito-Communications (TSE:4433, Financial) position by 29.63%, divesting of 42,400 shares. The transaction had an impact of -0.7% on the equity portfolio. During the quarter, shares traded for an average price of 1,559.49 yen each.
The Japan Small Cap Fund now holds 100,700 shares total, which make up 2.04% of the equity portfolio. The fund, according to GuruFocus, has lost an estimated 3.07% on the investment since the fourth quarter of 2014.
The business services company, which provides outsourcing, sales promotion and staffing services, has a market cap of 34.61 billion yen; its shares closed at 1,940 yen on Friday with a price-earnings ratio of 20.29, a price-book ratio of 2.81 and a price-sales ratio of 0.47.
According to the GF Value Line, the stock is modestly undervalued currently.
Hito-Communications' financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company is supported by a robust Altman Z-Score of 5.36. The ROIC also eclipses the WACC by a significant margin, indicating good value creation.
Although the operating margin is in decline, the company still has strong margins that outperform a majority of competitors. Hito-Communications also has a moderate Piotroski F-Score of 4 and a one-star predictability rank.
The fund holds 0.56% of the company's outstanding shares.
Additional trades and portfolio performance
Other major trades of the quarter included the sale of Juki Corp. (TSE:6440), reductions of the EF-ON Inc. (TSE:9514), Cosmos Pharmaceutical Corp. (TSE:3349) and Nippon Koei Co. Ltd. (TSE:1954) positions and a boost to the Nichiha Corp. (TSE:7943) holding.
Hennessy's $86 million equity portfolio, which is composed of 62 stocks, is mostly heavily invested in the industrials sector with a weight of 43.87%.
According to its website, the Japan Small Cap Fund returned 13.43% in 2020, eclipsing both the Russell/Nomura Small Cap Index's 4.97% return and the Tokyo Stock Price Index's return of 13.38%.
Disclosure: No positions.
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