The Hennessy Japan Small Cap Fund (Trades, Portfolio) screens for companies with strong businesses at attractive prices that are in the bottom 15% of Japanese companies in terms of market capitalization.
Year-to-date, the fund has returned 8.75% while the Russell/Nomura Small Cap Index declined -0.5%, and the Tokyo Stock Price Index declined 3.49%.
Industrials make up the majority of the portfolio’s assets at 35.8%, followed by information technology at 23.5%. In the fourth quarter, the fund purchased the following four stocks, listed in order of portfolio impact.
Benefit One (TSE:2412, Financial)
Hennessy purchased 21,000 shares of Benefit One, which traded for an average price of ¥1,417.73. The fund bought back in after selling out of a previous position in Q2 2012.
Benefit One provides employee benefits consulting and brokerage, as well as cost effective employee benefits plans. The stock has been up 78% over the past year and now trades at ¥1,651. The P/E ratio is 30.2 and the P/S ratio is 3.18.
Net income has been steadily increasing since 2011, and over the past five years has increased 6.77%.
The company has a comfortable balance sheet with a current ratio of 1.68. A ratio of greater than 1 indicates the company can cover its short-term obligations.
The current dividend yield is 1.28%, while the payout ratio is 33%.
Nifty Corporation (TSE:3828, Financial)
The fund purchased 14,900 shares of Nifty Corporation for an average price of ¥1,336.30 per share. The company is engaged in planning, development, and consulting for internet-related services such as sale of advertising, web content and ecommerce-related services.
Over the past year, the stock price has increased 18% and is now priced at ¥1,345. The Peter Lynch chart suggests the stock is undervalued.
In 2014, EBIT per share dipped to ¥205.05, down from ¥245.52 the year before. However, over the past five years, EBIT per share has increased more than 15%.
Currently, the dividend yield is 2.94%, and the payout ratio is 28%, which leaves room for growth in the future.
Furuya Metal Co. (TSE:7826, Financial)
Hennessy initiated a new holding in Furuya Metal with 6,100 shares for an average price of ¥2,884.73 per share.
Furuya manufactures and sells industrial-use precious metal products such as iridium, platinum and temperature sensors. It also sells electronic materials and semiconductor-related products.
Over the past five years, EBIT per share has decreased more than 38% and recorded at ¥169.03 in FY 2014.
In terms of net income, Furuya has been struggling and posted losses for both 2013 and 2014. Last year, net income was ¥-2,933 million.
Paltac Corp. (TSE:8283, Financial)
Hennessy’s fourth new buy was 6,400 shares in Paltac for ¥1,575.82 per share. The company is a wholesaler that distributes cosmetics, daily necessities and medicine to drugstores, supermarkets and convenience stores.
The stock price has increased 38% over the past year and is currently priced at ¥1,710 with a P/E ratio of 10.8 and P/S ratio of 0.13.
Net income has increased steadily since 2011 and was ¥9,185 million in 2014. Over the past five years, this figure has grown about 16%.
One warning sign is that the company’s operating margin has remained at about 1% since 2009 and dipped as low as 0.78% in 2011. This is far below the consumer packaged goods industry average of 5.3%.
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