The Hennessy Japan Small Cap Fund (Trades, Portfolio) released its first-quarter 2020 portfolio earlier this week, listing three 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.
Keeping these criteria in mind, the fund established positions in CyberAgent Inc. (TSE:4751, Financial), Iwatani Corp. (TSE:8088, Financial) and Musashi Seimitsu Industry Co. Ltd. (TSE:7220, Financial) during the quarter.
CyberAgent
The fund invested in 30,000 shares of CyberAgent, allocating 1% of the equity portfolio to the holding. During the quarter, the stock traded for an average price of 3,759.92 yen ($35.07) per share.
The Japanese media company, which focuses on online advertising, media and gaming businesses, has a market cap of 527.91 billion yen; its shares closed at 4,190 yen on Tuesday with a price-earnings ratio of 257.53, a price-book ratio of 7.03 and a price-sales ratio of 1.26.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 3 out of 10 also supports this assessment.
CyberAgent’s financial strength and profitability were both rated 8 out of 10 by GuruFocus. The company is supported by comfortable interest coverage as well as a high cash-debt ratio of 2.36. The robust Altman Z-Score of 5.87 also indicates it is in good financial standing.
Although the company’s operating margin is in decline, it still outperforms over half of its competitors. CyberAgent also has decent returns and a moderate Piotroski F-Score of 4, which implies operations are stable. Its business predictability rank of one out of five stars is on watch, however, as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFocus, companies with this rank typically see their stocks return an average of 1.1% per annum over a 10-year period.
The T. Rowe Price Japan Fund (Trades, Portfolio) has the largest holding in the company with 0.18% of outstanding shares. Hennessy holds 0.02%.
Iwatani
Having previously sold out of a position in Iwatani in the fourth quarter of 2012, Hennessy entered a new 19,500-share holding. The trade had an impact of 0.54% on the equity portfolio. The stock traded for an average per-share price of 3,703.13 yen during the quarter.
The company, which supplies gases for industrial and household use, has a market cap of 177.62 billion yen; its shares closed at 3,610 yen on Tuesday with a price-earnings ratio of 10.94, a price-book ratio of 1.18 and a price-sales ratio of 0.3.
According to the Peter Lynch chart, the stock is undervalued.
Both the financial strength and profitability of Iwatani were rated 6 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 2.39 suggests it is under some financial pressure.
The company is also supported by an expanding operating margin, strong returns that outperform over half of its industry peers and a moderate Piotroski F-Score of 4. Iwatani’s one-star business predictability rank is on watch as a result of a decline in revenue per share over the past five years.
The fund holds 0.04% of the company’s outstanding shares.
Musashi Seimitsu Industry
The Japan Small Cap Fund picked up 48,400 shares of Musashi Seimitsu Industry, dedicating 0.47% of the equity portfolio to the position. During the quarter, shares traded for an average price of 1,491.2 yen each.
The company, which manufactures auto parts and transportation equipment, has a market cap of 54.35 billion yen; its shares closed at 834 yen on Tuesday with a price-earnings ratio of 8.66, a price-book ratio of 0.6 and a price-sales ratio of 0.22.
Based on the Peter Lynch chart, the stock appears to be undervalued.
GuruFocus rated Musashi’s financial strength 6 out of 10 on the back of sufficient interest coverage. The Altman Z-Score of 2.04, however, suggests the company is under some financial stress.
Despite having a declining operating margin and returns that outperform around half of its competitors, the company’s profitability scored a 7 out of 10 rating. Musashi also has a low Piotroski F-Score of 2, which indicates operations are in poor shape, and a one-star business predictability rank that is on watch due to a slowdown in revenue per share growth over the past year.
The fund holds 0.07% of the company’s outstanding shares.
Additional trades and portfolio performance
During the quarter, the portfolio managers also added to several other holdings, including Matsuoka Corp. (TSE:3611, Financial), Star Mica Holdings Co. Ltd. (TSE:2975, Financial), Kasai Kogyo Co. Ltd. (TSE:7256), Cosmos Pharmaceutical Corp. (TSE:3349) and Starzen Co. Ltd. (TSE:8043).
Hennessy’s $120 million equity portfolio, which is composed of 60 stocks, is largely invested in the industrials sector at 42.18%, followed by smaller positions in the technology (19.89%) and consumer cyclical (11.77%) 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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