The Hennessy Japan Small Cap Fund (Trades, Portfolio) released its fourth-quarter 2019 portfolio earlier this week, listing five new holdings.
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.
Based on these criteria, the fund established positions in Cosmos Pharmaceutical Corp. (TSE:3349, Financial), Fuji Corp. (TSE:6134, Financial), Hoshizaki Corp. (TSE:6465, Financial), Nojima Co. Ltd. (TSE:7419, Financial) and Cyberdyne Inc. (TSE:7779, Financial) during the quarter.
Cosmos Pharmaceutical
The fund invested in 9,500 shares of Cosmos Pharmaceutical, dedicating 1.57% of the equity portfolio to the holding. The stock traded for an average price of 21,590.7 yen ($196.99) per share during the quarter.
The drugstore chain operator has a market cap of 459.55 billion yen; its shares closed at 23,210 yen on Thursday with a price-earnings ratio of 23.75, a price-book ratio of 3.53 and a price-sales ratio of 0.74.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
Cosmos’ financial strength and profitability were both rated 8 out of 10 by GuruFocus. Boosted by good debt ratios and comfortable interest coverage, the Altman Z-Score of 4.87 indicates the company is financially healthy.
Although the operating margin is in decline, the company is supported by strong returns that outperform over half of its competitors, steady earnings and revenue growth and a moderate Piotroski F-Score of 4, which implies business conditions are stable. Cosmos also has a business predictability rank of four out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.8% per annum over a 10-year period.
The fund holds 0.05% of the company’s outstanding shares.
Fuji
Having previously exited a position in Fuji in the first quarter of 2018, Hennessy entered a new holding of 83,600 shares, allocating it to 1.11% of the equity portfolio. During the quarter, the stock traded for an average price of 1,529.77 yen per share.
The automobile supplier, which primarily focuses on wheels and tires, has a market cap of 184.88 billion; its shares closed at 2,024 yen on Thursday with a price-earnings ratio of 11.57, a price-book ratio of 1.11 and a price-sales ratio of 1.4.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated Fuji’s financial strength 7 out of 10, driven by adequate interest coverage and a robust Altman Z-Score of 6.57.
The company’s profitability scored an 8 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Fuji’s one-star business predictability rank, however, is on watch. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.
The fund holds 0.09% of Fuji’s outstanding shares.
Hoshizaki
The Japan Small Cap Fund picked up 16,000 shares of Hoshizaki, giving it 1.09% space in the equity portfolio. Shares traded for an average price of 8,065.08 yen during the quarter.
The industrial kitchen equipment manufacturer has a market cap of 729.28 billion yen; its shares closed at 10,070 yen on Thursday with a price-earnings ratio of 30.68, a price-book ratio of 3.11 and a price-sales ratio of 2.49.
Based on the Peter Lynch chart, the stock appears to be overvalued.
Boosted by no long-term debt and comfortable interest coverage, Hoshizaki’s financial strength was rated 9 out of 10 by GuruFocus. In addition, the high Altman Z-Score of 6.3 suggests it is in good financial standing.
The company’s profitability scored an 8 out of 10 rating. Despite being supported by expanding margins and strong returns, Hoshizaki has a low Piotroski F-Score of 3, which indicates operating conditions are in poor shape. Additionally, as a result of a slowdown in revenue growth over the past 12 months, its 2.5-star business predictability rank is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 7.3% per year.
The T. Rowe Price Japan Fund (Trades, Portfolio) is the company’s largest guru shareholder with 0.29% of outstanding shares. Hennessy holds 0.02%.
Nojima
Hennessy purchased 74,700 shares of Nojima, expanding the equity portfolio 1.06%. The stock traded for an average per-share price of 1,796.38 yen during the quarter.
The manufacturer and retailer of digital audio and visual-related equipment, information technology equipment and electric appliances has a market cap of 111.58 billion; its shares closed at 2,229 yen on Thursday with a price-earnings ratio of 6.82, a price-book ratio of 1.27 and a price-sales ratio of 0.22.
The Peter Lynch chart suggests the stock is undervalued.
GuruFocus rated Nojima’s financial strength 6 out of 10 on the back of sufficient interest coverage. The Altman Z-Score of 2.93, however, indicates the company is under some financial pressure as it has recorded a slowdown in revenue growth over the past year.
The company’s profitability scored an 8 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Nojima also has a four-star business predictability rank.
The fund holds 0.15% of the company’s outstanding shares.
Cyberdyne
The fund bought 95,800 shares of Cyberdyne. The trade had an impact of 0.49% on the equity portfolio. The stock traded for an average price of 661.05 yen per share during the quarter.
The robotics and technology company has a market cap of 123.92 billion yen; its shares closed at 576 yen on Thursday with a price-book ratio of 2.8 and a price-sales ratio of 69.59.
According to the median price-sales chart, the stock is overvalued.
Cyberdyne’s financial strength was rated 7 out of 10 by GuruFocus. Supported by a high cash-debt ratio of 82.49, the robust Altman Z-Score of 30.62 indicates the company is in good financial shape.
The company’s profitability did not fare as well, scoring a 3 out of 10 rating. Although the operating margin is expanding, it underperforms a majority of industry peers. Cyberdyne is also being weighed down by negative returns as well as a slowdown in revenue growth over the last 12 months. It also has a moderate Piotroski F-Score of 4.
Hennessy holds 0.04% of the company’s outstanding shares.
Additional trades
During the quarter, the portfolio managers also added to holdings of Towa Corp. (TSE:6315), Starzen Co. Ltd. (TSE:8043) and Matsuoka Corp. (TSE:3611).
The fund’s $125 million equity portfolio, which is composed of 61 stocks, is largely invested in the industrials sector at 39.44%, followed by smaller positions in the technology (22.30%) and consumer cyclical (15.03%) spaces.
According to its website, the Japan Small Cap Fund returned 19.95% in 2019, eclipsing both the Russell/Nomura Small Cap Index’s 18.34% return and the Tokyo Stock Price Index’s return of 19.67%.
Disclosure: No positions.
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