The Hennessy Japan Small Cap Fund (Trades, Portfolio) disclosed its first-quarter 2022 13F portfolio earlier this week.
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.
Adhering to these criteria, the fund established one new position during the three months ended Jan. 31, sold out of one stock and added to or trimmed a slew of other existing holdings. Among its most notable trades were a new investment in Macromill Inc. (TSX:3978), boosts to the Tsubakimoto Chain Co. (TSE:6371, Financial) and Ushio Inc. (TSE:6925, Financial) holdings and reductions to its positions in Senko Group Holdings Co. Ltd. (TSE:9069, Financial) and Cosmos Pharmaceutical Corp. (TSE:3349, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Macromill
After previously exiting a position in Macromill (TSE:3978, Financial) in the fourth quarter of 2019, the fund entered a new 116,500-share holding, allocating it to 1.19% of the equity portfolio. The stock traded for an average price of 997.49 yen ($8.08) per share during the quarter.
The communication services company, which provides marketing research and digital market solutions, has a market cap of 46.57 billion yen; its shares closed at 1,180 yen on Monday with a price-earnings ratio of 13.78, a price-book ratio of 1.52 and a price-sales ratio of 1.02.
The GF Value Line suggests the stock is modestly overvalued based on historical ratios, past financial performance and future earnings projections.
GuruFocus rated Macromill’s financial strength 3 out of 10. Despite having adequate interest coverage, the Altman Z-Score of 1.83 indicates the company is under some pressure. The return on invested capital, however, eclipses the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability fared better, scoring an 8 out of 10 rating. Although the operating margin is in decline, its returns on equity, assets and capital outperform a majority of competitors. Macromill also has a high Piotroski F-Score of 7 out of 9, meaning business conditions are healthy, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
The fund holds 0.30% of Macromill’s outstanding shares.
Tsubakimoto Chain
The Japan Small Cap Fund upped its Tsubakimoto Chain (TSE:6371, Financial) position by 91.05%, buying 29,500 shares. The transaction had an impact of 0.87% on the equity portfolio. Shares traded for an average price of 3,111.23 yen each during the quarter.
It now holds 61,900 shares total, accounting for 1.83% of the equity portfolio. GuruFocus says it has lost an estimated 6.89% on the investment so far.
The manufacturer of power transmission and roller chain prodicts has a market cap of 112.9 billion yen; its shares closed at 3,050 yen on Monday with a price-earnings ratio of 7.95, a price-book ratio of 0.57 and a price-sales ratio of 0.54.
According to the GF Value Line, the stock is modestly undervalued currently.
Tsubakimoto’s financial strength was rated 6 out of 10 by GuruFocus, driven by a comfortable level of interest coverage. The Altman Z-Score of 2.42, however, indicates the company is under some pressure since revenue per share has declined in recent years. The WACC also surpasses the ROIC, meaning the company struggles to create value.
The company’s profitability scored a 7 out of 10 rating even though the operating margin has declined and returns underperform a majority of industry peers. Tsubakimoto has a moderate Piotroski F-Score of 5, suggesting conditions are typical for a stable company, and a one-star predictability rank.
The fund holds 0.17% of Tsubakimoto’s outstanding shares.
Ushio
Hennessy increased its Ushio (TSE:6925, Financial) holding by 60.34%, buying 35,000 shares. The transaction had an impact of 0.58% on the equity portfolio. The stock traded for an average per-share price of 2,008.97 yen during the quarter.
The Japan Small Cap Fund now holds 93,000 shares in total, which represent 1.53% of the equity portfolio. The fund has lost an estimated 8.83% on the investment so far based on GuruFocus data.
The company, which manufactures lighting systems, has a market cap of 214.23 billion yen; its shares closed at 1,773 yen on Monday with a price-earnings ratio of 20.3, a price-book ratio of 0.96 and a price-sales ratio of 1.46.
Based on the GF Value Line, the stock appears to be modestly overvalued currently.
GuruFocus rated Ushio’s financial strength 7 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 3.49. The WACC exceeds the ROIC, however, so the company is struggling to create value.
The company’s profitability did not fare as well with a 5 out of 10 rating. In addition to a declining operating margin, returns are underperforming over half of its competitors. Ushio also has a moderate Piotroski F-Score of 5. Although revenue per share has declined in recent years, it still has a one-star predictability rank.
With a 1.23% stake, the Matthews Japan Fund (Trades, Portfolio) is Ushio’s largest guru shareholder.
Senko Group
With an impact of -0.54% on the equity portfolio, Hennessy trimmed its Senko Group (TSE:9069, Financial) position by 29.64%, selling 62,600 shares. During the quarter, the stock traded for an average price of 944.56 yen per share.
The fund now holds 148,600 shares total, which make up 1.26% of the equity portfolio. GuruFocus estimates it has lost 2.86% on the investment over its lifetime.
The logistics company has a market cap of 129.41 billion yen; its shares closed at 893 yen on Monday with a price-earnings ratio of 11.27, a price-book ratio of 0.92 and a price-sales ratio of 0.28.
The GF Value Line suggests the stock is fairly valued currently.
Senko’s financial strength was rated 3 out of 10 by GuruFocus. Despite having a comfortable level of interest coverage, the Altman Z-Score of 2.15 indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing. Value is being created, however, since the ROIC overshadows the WACC.
The company’s profitability fared well with a 7 out of 10 rating. Although the operating margin is in decline, returns outperform over half of its industry peers. Senko also has a moderate Piotroski F-Score of 6 out of 9. Despite recording a decline in revenue per share recently, it still has a three-star predictability rank. GuruFocus data shows companies with this rank return, on average, 8.2% annually.
The fund holds 0.10% of Senko’s outstanding shares.
Cosmos Pharmaceutical
Impacting the equity portfolio by -0.54%, the Japan Small Cap Fund curbed its Cosmos Pharmaceutical (TSE:3349, Financial) holding by 36.27%, selling 3,700 shares. During the quarter, shares traded for an average price of 17,084.8 yen each.
It now holds 6,500 shares in total, giving the stock 0.86% space in the equity portfolio. GuruFocus data shows the fund has gained an estimated 31.50% on the investment, which was established in the fourth quarter of 2019.
The company, which operates retail drugstores, has a market cap of 578.54 billion yen; its shares closed at 14,610 yen on Monday with a price-earnings ratio of 22.84, a price-book ratio of 3.21 and a price-sales ratio of 0.78.
According to the GF Value Line, the stock is currently modestly undervalued.
Cosmos’ financial strength and profitability were both rated 9 out of 10 by GuruFocus. In addition to sufficient interest coverage, the robust Altman Z-Score of 5.37 indicates the company is in good standing. The ROIC is above the WACC, so value is being created.
Although the operating margin has declined, the company is supported by strong returns that top a majority of competitors as well as a high Piotroski F-Score of 8 and a one-star predictability rank.
Hennessy holds 0.02% of the company’s outstanding shares. The iShares MSCI ACWI ex U.S. ETF (Trades, Portfolio) also has a position in the stock.
Additional trades and portfolio performance
Other major trades of the quarter included additions to holdings of Septeni Holdings Co. Ltd. (TSE:4293, Financial), Kyoei Steel Ltd. (TSE:5440, Financial), Tadano Ltd. (TSE:6395, Financial) and Sac’s Bar Holdings Inc. (TSE:9990, Financial) and a reduction in the Lifenet Insurance Co. (TSE:7157, Financial) position.
Hennessy’s $95 million equity portfolio, which is composed of 63 stocks, is mostly heavily invested in the industrials sector with a weight of 40.28%.
According to its website, the Japan Small Cap Fund returned -4.65% in 2021, underperforming both the Russell/Nomura Small Cap Index’s -2.81% return and the Tokyo Stock Price Index’s return of 0.96%.
