The Hennessy Japan Fund (Trades, Portfolio) released its fourth-quarter portfolio earlier this week, listing two new positions. It also disclosed it exited one of its other holdings.
Managed by Masakazu Takeda and Yu Shimizu, the fund, which is part of California-based Hennessy Advisors, invests in a concentrated number of high-quality Japanese companies. The portfolio managers look for value opportunities among companies that have good management, a strong balance sheet with little to no debt, a durable competitive advantage, a high return on equity, strong cash flow generation and above-average earnings growth.
Based on these criteria, the fund established holdings in Takeda Pharmaceutical Co. Ltd. (TSE:4502, Financial) and Relo Group Inc. (TSE:8876, Financial) and divested of its Toyota Motor Corp. (TSE:7203, Financial) position during the quarter.
Takeda Pharmaceutical
The fund invested in 628,000 shares of Takeda, allocating 3.36% of the equity portfolio to the position. The stock traded for an average price of 3,713.23 yen ($34.01) per share during the quarter.
The Japanese pharmaceutical company, which focuses on the oncology, gastroenterology, vaccines and neurology spaces, has a market cap of 6.7 trillion yen; its shares closed at 4,250 yen on Wednesday with a price-earnings ratio of 126.79, a price-book ratio of 1.36 and a price-sales ratio of 1.97.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
While GuruFocus has not rated its financial strength or profitability, Takeda’s prospects don’t look too bright as it is weighed down by debt and has extremely low interest coverage. In addition, the Altman Z-Score of 0.97 warns the company could be in danger of going bankrupt as its revenue per share has been in decline for several years.
Despite the fact its margins and returns underperform over half of its competitors, Takeda’s Piotroski F-Score of 5 indicates its operations are stable. It also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Takeda, the Vanguard Health Care Fund (Trades, Portfolio) has the largest stake with 0.67% of outstanding shares. The Causeway International Value (Trades, Portfolio) Fund and the T. Rowe Price Japan Fund (Trades, Portfolio) are also shareholders.
Relo Group
The Japan Fund picked up 489,000 shares of Relo Group, dedicating 1.77% of the equity portfolio to the holding. During the quarter, shares traded for an average price of 2,630.28 yen.
The business services company, which provides corporate fringe benefit management outsourcing solutions, has a market cap of 457.63 billion yen; its shares closed at 3,065 yen on Wednesday with a price-earnings ratio of 38.87, a price-book ratio of 8.47 and a price-sales ratio of 1.85.
According to the Peter Lynch chart, the stock is overvalued.
Relo’s financial strength scored a 6 out of 10 rating on the back of comfortable interest coverage and a high Altman Z-Score of 3.68, which indicates the company is in good standing financially.
The company’s profitability fared even better with a 9 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of industry peers and consistent revenue and earnings growth. One weakness for Relo is a low Piotroski F-Score of 2, which suggests its business conditions are in poor shape. Regardless, it has a 4.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 10.6% per year.
The Matthews Japan Fund (Trades, Portfolio) is Relo’s largest guru shareholder with 1.7% of outstanding shares. Hennessy holds 0.33%.
Toyota
Hennessy sold its 324,100 remaining shares of Toyota, impacting the equity portfolio by -3.34%. The stock traded for an average per-share price of 7,140.13 yen during the quarter.
GuruFocus estimates the fund gained 3.95% on the investment since establishing it in the third quarter of 2013.
The automaker has a market cap of 21.60 trillion yen; its shares closed at 7,617 yen on Wednesday with a price-earnings ratio of 11.44, a price-book ratio of 1.07 and a price-sales ratio of 0.71.
Based on the Peter Lynch chart, the stock appears to be undervalued.
GuruFocus rated Toyota’s financial strength 5 out of 10. Despite issuing approximately 2.7 trillion yen in new long-term debt over the past three years, it is at a manageable level due to the company’s comfortable interest coverage. The Altman Z-Score of 1.79, however, warns it is in financial distress and could be at risk of bankruptcy.
The company’s profitability scored a 7 out of 10 rating. Although the operating margin has declined over the past several years, it still outperforms a majority of its competitors. Toyota is also supported by strong returns and a moderate Piotroski F-Score of 6. Its one-star business predictability rank is on watch.
David Herro (Trades, Portfolio) is the company’s largest guru shareholder with 0.26% of outstanding shares.
Additional trades and portfolio performance
During the quarter, the Japan Fund also trimmed its holdings of Japan Tobacco Co. (TSE:2914, Financial) and Sumitomo Mitsui Financial Group Inc. (TSE:8316, Financial) and boosted its positions in Ariake Japan Co. Ltd. (TSE:2815), Anicom Holdings Inc. (TSE:8715) and Nitori Holdings Co. Ltd. (TSE:9843).
Hennessy’s $675 million equity portfolio, which is composed of 26 stocks, is heavily invested in the industrials sector at 33.15%. It also has smaller holdings in the consumer defensive (20.56%) and consumer cyclical (20.10%) spaces.
According to its website, the fund posted an 18.04% return in 2019, slightly underperforming the Russell/Nomura Total Market Index’s return of 20.07% and the Tokyo Stock Price Index’s return of 19.67%.
Disclosure: No positions.
GuruFocus 15-year anniversary promotion
The holiday season is here, and so is GuruFocus’s 15-year anniversary! In order to celebrate, we are offering an exclusive holiday discount of up to 30% off on our GuruFocus Premium Membership.
Join now to get GuruFocus Premium membership for only $399/Year! In addition, save an extra $100 when you upgrade to our PremiumPlus Membership, and enjoy $100 off the price of each additional region you add to the subscription.
Don’t miss out on this once-in-a-decade deal! You can sign up for the discount price by clicking this link. Happy holidays!
Read more here:
