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James Li
James Li
Articles (1441)  | Author's Website |

Matthews Japan Fund Seeks Capital Growth in 2nd Quarter

Fund reports quarterly portfolio

Kenichi Amaki and Taizo Ishida, managers of the Matthews Japan Fund (Trades, Portfolio), seek long-term capital appreciation by investing in Japanese stocks with high growth potential. As mentioned in its prospectus, Amaki and Ishida emphasize companies with sustainable growth, cash flow stability and good financial strength.

During the second quarter, the fund invested in three companies and eliminated its positions in three others.

Fund buys three stocks with high growth potential

The Japan Fund purchased 2,716,000 shares of Fujitsu General Ltd. (TSE:6755) at an average price of 1,944.57 Japanese yen per share. With this investment, the fund’s portfolio increased 1.89%. Currently, Fujitsu has high interest coverage: the company’s interest coverage outperforms 80% of global home furnishings and fixtures companies. Additionally, Fujitsu has a high profitability rank, implying potential for sustainable growth. The engineering and electronics company has expanding operating margins, and its current return on equity and three-year revenue growth outperform 85% and 80% of global home furnishings and fixtures companies. With strong margins and growth potential, Fujitsu has a financial strength of 8, implying a strong business operation.

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Amaki and Ishida also purchased 335,700 shares of Relo Group Inc. (TSE:8876) and 1,259,700 shares of MonotaRO Co. Ltd. (TSE:3064), which increased the fund’s portfolio by 1.86% and 1.30%. The companies’ stock prices averaged 15,402.62 yen and 3,461.38 yen per share. Both companies, like Fujitsu, have high financial strength and profitability ratings, which suggest potential for high growth and stable cash flows. Even though Relo Group has a modest Piotroski F-score of 4, the company has strong interest coverage and returns on invested capital. Additionally, the business services company has expanding operating margins, and its current ROE of 23.08% outperforms its historical high ROE of 22.30%.

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Industrial company MonotaRO currently has a Greenblatt return on capital that outperforms 97% of global tools and accessories companies. The company also has expanding operating margins, high ROE, three-year revenue growth and three-year EPS growth.

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Declining margins and revenue growth lead to sell out

On the sell side, the Japan Fund eliminated its positions in Shin-Etsu Chemical Co. Ltd. (TSE:4063), Cookpad Inc. (TSE:2193) and eGuarantee Inc. (TSE:8771). Contracting margins and per-share revenue growth present two likely reasons for the sellouts.

After gradually increasing its position in Shin-Etsu Chemical since 2013, Amaki and Ishida sold all 963,700 shares in the chemical manufacturing company at an average price of 6,109.38 yen per share, trimming 1.92% of their portfolio. While the company has expanding operating margins and no debt, Shin-Etsu experienced a per-share revenue growth slowdown in the past year.

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Despite having high financial strength and profitability, marketing services company Cookpad has a poor Piotroski F-score of 3 and contracting margins. These warning signs suggest that Cookpad has a weakening business operation and thus faces bankruptcy risk. While Cookpad has a return on equity that outperforms 86% of global marketing services companies, the company currently has a lower ROE than its historical minimum ROE. Additionally, Cookpad may have manipulated its earnings based on its Beneish M-score.

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Unlike Cookpad, eGuarantee has a modest profitability rank of 5, implying satisfactory growth potential. The credit services company has declining per share revenue growth: currently, its three-year revenue growth only outperforms 54% of companies in its industry. Additionally, the company’s stock price is near a three-year high, implying potential devaluation in the short term.

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See also

You can view all guru trades occurring in Japan by using the “International Picks” feature. Upon clicking international picks, you will first see all buys and sells around the world. To narrow your search to a certain country, you can click that country’s name from the gray box titled “Stock Buys by Country / Region.” For more information about this feature, you can refer to a previous article on international trades.

Additionally, you can also search for good Japanese stocks in which to invest using the All-in-One Guru Screener. The following screener implements the Japan Fund’s investing strategy.

  • The company trades in Japan.
  • The company has a financial strength of at least 7.
  • The company’s profitability rank is at least 7.
  • The company’s five-year revenue growth rate is at least 15%.
  • The company’s operating margin is at least 10%.

Thirty-four companies meet all of the above criteria as of Aug. 1.

Disclosure: The author currently has no position in the stocks mentioned in this article.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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