The Hennessy Japan Fund (Trades, Portfolio) sold its holding of Sumitomo Corp. (TSE:8053, Financial) in the final quarter of 2016.
The fund was established in 2003 and is managed by Masakazu Takeda and Yu Shimizu. The fund invests in Japanese companies with strong businesses and management that trade at an appealing price in order to meet the goal of long-term capital appreciation. The managers employ in-depth analysis in order to identify stocks with a significant value gap. They manage a concentrated portfolio of 20 stocks valued at $119 million.
The fund has been reducing its holding since the first quarter of 2015. It sold its remaining 26,100 shares for an average price of 1,295.41 yen ($11.37) per share. The sale had an impact of -0.24% on the portfolio.
Sumitomo is a Japanese company involved in integrated trading and investment business enterprises. It has a market cap of 1.7 trillion yen and an enterprise value of 4.5 trillion yen. Its shares were trading around 1,398.5 yen Monday with a price-earnings (P/E) ratio of 159.6, a price-book (P/B) ratio of 0.8 and a price-sales (P/S) ratio of 0.4.
The Peter Lynch chart below suggests the stock is trading above its intrinsic value.
GuruFocus ranked Sumitomo’s financial strength 4 of 10. While the Piotroski F-Score of 5 suggests the company is in stable business condition, the Altman Z-Score of 1.3 indicates the company is at risk of bankruptcy in the near future. The company is destroying value as it grows because its return on invested capital (ROIC) underperforms its weighted average cost of capital (WACC). The cash-debt ratio of 0.3 and interest coverage ratio of 1.8 suggest the company is not able to cover its outstanding debt or interest costs with cash on hand.
Sumitomo’s profitability and growth was ranked 7 of 10 by GuruFocus. It has an operating margin of 1.4% and a net margin of 0.3%. The return on equity (ROE) and return on capital (ROC) underperform 55% of other companies in the global conglomerates industry. In contrast, the return on assets (ROA) outperforms 52% of competitors.
The fund holds one other conglomerate in its portfolio, Mitsubishi Corp. (TSE:8058, Financial). The fund’s weight in the industrial sector is 25.8%.
Disclosure: I do not own any stocks mentioned in the article.
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