Hennessy Japan Fund Buys, Adds to Holdings in Undervalued Q1 Market

Japan stocks look attractive with low PE ratios, fund says

Author's Avatar
Apr 01, 2016
Article's Main Image

In the first quarter, managers purchased three new stocks for the Hennessy Japan Small Cap Fund (Trades, Portfolio) and only added to existing positions in the Hennessy Japan Small Cap Fund (Trades, Portfolio) as Japan implements structural reforms and Japanese stocks appear inexpensive, they said.

From a macro level, Japan Prime Minister Shinzo Abe’s economic reforms have stimulated the economy, with two years of quantitative easing driving the improvement new public works spending. The final part of Abe’s plan, structural reforms, is still in relatively early stages.

By the end of 2015, Japan had implemented several structural reforms such as the third reduction in three years of corporate taxes effective in April 2016 and an increase in taxes for unprofitable companies. The economy is also benefitting from significantly higher tourism, favorable exposure to the U.S. as China’s economy struggles and wage increases.

Japan’s Nikkei 225 Index has declined 15% year to date and 16.2% over the past year as the S&P 500 Index and returned 1.48% and 0.56% over the same periods. The funds’ portfolio managers, Masakazu Takeda and Tadahiro Fujimura, believe the Japanese stocks look attractive.

“We believe Japanese stocks are not expensive, as stock prices generally kept pace with corporate earnings in 2015,” they said in their fourth quarter letter.

The low-priced environment has drawn other much-followed investors, such as Daniel Loeb (Trades, Portfolio) of hedge fund Third Point, who bought a 5% activist stake in Japan’s Seven & I, last year. He also held shares of Sony Corp. (SNE, Financial), IHI Corp. (TSE:7013, Financial) and Suzuki Motor Corp. (TSE:7269, Financial).

Loeb’s interest in Japan began at least three years ago, when he wrote an op-ed in The Wall Street Journal discussing the opportunities for activism in the country.

“Japanese corporate assets are inefficiently managed by international standards…” he wrote. “Simply put, each unit of Japanese private capital produces only one half the amount of output generated by one unit of American private capital.”

For Hennessy managers, several more attributes of Japan’s market made stocks attractive, such as lower price-earnings ratios than in Europe, the U.S. and Asia. At the end of March, the P/E ratio of the Tokyo Stock Exchange was 15, compared to 19 for the NYSE. EPS growth also appears likely, forecast at 7% for 2016 due to lower corporate tax rates, strong domestic growth and share repurchases, managers said in their letter. Exposure to China may weigh on Japanese businesses in 2016, but they deal more with Japan’s largest export for markets, the U.S.

Still other followed investors have been selling Japanese stocks. David Dreman (Trades, Portfolio), for one dropped his position in the three Japanese stocks that saw the most selling, according to GuruFocus All-in-One screener: Toyota Motor Corp. (TM, Financial), Honda Motor Co. Ltd. (HMC, Financial) and Mitsubishi UFJ Financial Group Inc. (MTU, Financial). Dodge & Cox, holder of the largest position in the most-held stock, Honda Motor, sold more than 1 million shares in the fourth quarter, with frequent selling since 2011.

The Hennessy Japan Fund (Trades, Portfolio) has $115.7 million in assets under management and an 8.23% annualized return since inception in 2013 that beats its benchmark Russell/Nomura Total Market Index return of 4.4%. The Small Cap Fund has $25.3 million in assets and an 8.5% return since inception in 2007 that beats the Russell/Nomura Small Cap Index return of 4.6%.

Both funds seek high-quality, global companies with high barriers to entry, capable management, high return on equity predictable earnings growth and strong cash flow. The small-cap fund specializes in companies that could benefit from the economic recovery and strengthening domestic demand, their letter said.

Below is an overview of the funds’ top common stock buying in the first quarter 2016.

Hennessy Japan Fund (Trades, Portfolio) Top Common Stock Portfolio Increases

ASICS Corp. (TSE:7936, Financial)

Managers increased the position in ASICS Corp. 42.7% to 314,800 shares, or 5.5% of the portfolio. The company’s average share price was 2110 yen for the quarter.

ASICS Corp. has a market cap of $380.59 billion; its shares were traded around 1921.00 yen with a P/E ratio of 38.97 and P/S ratio of 0.95. The trailing 12-month dividend yield of ASICS Corp. stocks is 1.17%. The forward dividend yield of ASICS Corp. stocks is 1.17%. ASICS Corp. had an annual average earnings growth of 7.9% over the past 10 years.

Mitshubishi Corp. (TSE:8058, Financial)

Managers increased the position by 16.4% to 370,200 shares, or 5.59% of the portfolio. The company’s average share price was 1902 yen for the quarter.

Mitsubishi Corp. has a market cap of $3019.83 billion; its shares were traded around 1839.50 yen with a P/E ratio of 9.43 and P/S ratio of 0.42. The trailing 12-month dividend yield of Mitsubishi Corp. stocks is 2.62%. The forward dividend yield of Mitsubishi Corp. stocks is 2.62%. Mitsubishi Corp. had an annual average earnings growth of 8.0% over the past five years.

Pigeon Corp. (TSE:7956)

Managers increased the position by 14.4% to 92,100 shares, or 1.86% of the portfolio. The company’s average share price was 2620 yen for the quarter.

Pigeon Corp. has a market cap of 351.75 billion yen; its shares were traded around 2858.00 yen with a P/E ratio of 35.66 and P/S ratio of 3.86. The trailing 12-month dividend yield of Pigeon Corp. stocks is 1.43%. The forward dividend yield of Pigeon Corp. stocks is 1.36%. Pigeon Corp. had an annual average earnings growth of 13.5% over the past 10 years. GuruFocus rated Pigeon Corp. the business predictability rank of 3.5-star.

Japan Small Cap Fund Buys

Bellsystem24 Holdings Inc. (TSE:6183)

Managers purchased 53,400 shares of Bellsystem24 Holdings Inc., a 2.07% portfolio weight. The company’s average share price was 1134 yen per share for the quarter.

Bellsystem24 has a P/E ratio of 0.77. The trailing 12-month dividend yield of Bellsystem24 Holdings Inc. stocks is 1.44%. The forward dividend yield of Bellsystem24 Holdings Inc. stocks is 2.89%.

Tasaki Shinju Co. Ltd. (TSE:7968)

Managers purchased 32,600 shares of Tasaki Shinju Co. Ltd., a 1.63% portfolio weight. The company’s average share price averaged 1501 yen for the quarter.

Tasaki Shinju Co. Ltd. has a market cap of 24.04 billion yen; its shares were traded around 1657.00 yen with a P/E ratio of 3.17 and P/S ratio of 1.04. The trailing 12-month dividend yield of Tasaki Shinju Co. Ltd. stocks is 2.26%. The forward dividend yield of Tasaki Shinju Co. Ltd. stocks is 4.52%.

Digital Garage Inc. (TSE:4819)

Managers purchased 15,200 shares of Digital Garage Inc., a 0.99% portfolio weight. The company’s share price averaged 1924 yen for the quarter.

Digital Garage Inc. has a market cap of $96.46 billion; its shares were traded around 1972.00 yen with a P/E ratio of 28.63 and P/S ratio of 2.41. The trailing 12-month dividend yield of Digital Garage Inc. stocks is 0.24%. The forward dividend yield of Digital Garage Inc. stocks is 0.73%.

Click here for Hennessy Japan Fund (Trades, Portfolio)’s portfolio. Click here for Hennessy Japan Small Cap Fund (Trades, Portfolio)’s portfolio.Click here to get more great information by starting a free 7-day trial of Premium Membership to GuruFocus.