The Hennessy Japan Small Cap Fund (Trades, Portfolio), part of the Hennessy Funds, released its first-quarter portfolio on Monday, listing 14 new positions.
Managed by Tadahiro Fujimura and Tetsuya Hirano, the fund invests in small-cap Japanese companies to achieve long-term capital appreciation. Using thorough research and analysis, the portfolio managers hunt for stocks with a significant value gap, have a strong business, are trading at an attractive price and have a market cap in the bottom 15% of all Japanese companies.
The fund’s top five new buys for the quarter were Macromill Inc. (TSE:3978, Financial), Asahi Holdings Inc. (TSE: 5857), Aozora Bank Ltd. (TSE:8304, Financial), Resorttrust Inc. (TSE:4681, Financial) and Topre Corp. (TSE:5975, Financial).
Macromill
Hennessy largest trade for the quarter was 171,100 shares of Macromill for an average price of 2,809 yen ($26.55) per share, giving it 2.24% portfolio space.
The Japanese online research platform has a market cap of 124.84 billion yen; its shares were trading around 3,175 yen on Monday with a price-earnings ratio of 30.20, a price-book ratio of 5.44 and a price-sales ratio of 3.41.
The Peter Lynch chart below shows the stock is trading above its fair value, suggesting it is overpriced.
GuruFocus ranked Macromill’s financial strength 5 out of 10. While its interest coverage is above Benjamin Graham’s threshold of 5, its Altman Z-Score of 2.63 suggests the company has some financial issues. The company’s profitability and growth was ranked 3 of 10 as its operating margin has been declining, though it still outperforms 78% of competitors.
The fund holds 0.44% of the company’s outstanding shares.
Asahi Holdings
The fund purchased 215,000 shares of Asahi Holdings for an average price of 2,135.58 yen per share, expanding the portfolio 2.19%.
The waste management company has a market cap of 71.62 billion yen; its shares were trading around 1,951 yen per share on Monday with a price-earnings ratio of 174.66, a price-book ratio of 1.13 and a price-sales ratio of 0.55.
According to the Peter Lynch chart below, the stock is overpriced as it is trading higher than its fair value.
Asahi’s financial strength was rated 6 out of 10 by GuruFocus. While its interest coverage meets Graham’s minimum, the Altman Z-Score of 2.89 suggests the company has minor financial stress. As the company’s operating margin has declined over the past five years, its profitability and growth was rated 4 of 10. It also has a moderate Piotroski F-Score of 4.
Hennessy holds 0.59% of the company’s outstanding shares.
Aozora Bank
The small-cap fund bought 103,900 shares of Aozora for an average price of 4,407.88 yen per share. The trade had an impact of 2.17% on the portfolio.
The bank has a market cap of 488.8 billion yen; its shares were trading around 4,190 yen on Monday with a price-earnings ratio of 11.69, a price-book ratio of 1.10 and a price-sales ratio of 4.09.
Based on the Peter Lynch chart below, the stock appears to be undervalued as it is trading below its fair value.
As the company has insufficient interest coverage, GuruFocus ranked Aozora’s financial strength 4 out of 10. The company’s profitability and growth was ranked 6 of 10 as its operating margin is expanding and it has a one-star business predictability rating.
The fund holds 0.09% of the company’s outstanding shares.
Restorttrust
Hennessy invested in 174,600 shares of Resorttrust for an average price of 2,471.98 yen per share, giving it 2.14% portfolio space.
The company, which constructs and operates membership hotels, has a market cap of 234.47 billion yen; its shares were trading around 2,199 yen on Monday with a price-earnings ratio of 25.05, a price-book ratio of 2.01 and a price-sales ratio of 1.68.
The Peter Lynch chart below shows the stock is trading higher than its fair value, suggesting it is overpriced.
Resorttrust’s financial strength was rated 5 out of 10. While the company has sufficient interest coverage, its Altman Z-Score suggests it has some financial stress. Its profitability and growth was rated 7 of 10 as its operating margin is expanding, it has a high Piotroski F-Score of 7 and a one-star business predictability rating.
The fund holds 0.16% of the company’s outstanding shares.
Topre
Having previously exited a position in Topre in the second quarter of 2012, the fund established a new holding of 135,900 shares for an average price of 3,251.44 yen per share. The trade had an impact of 2.13% on the portfolio.
The auto parts supplier has a market cap of 155.3 billion yen; its shares were trading around 3,095 yen on Monday with a price-earnings ratio of 9.65, a price-book ratio of 1.15 and a price-sales ratio of 0.89.
According to the Peter Lynch chart below, the stock is undervalued as it is trading below its fair value.
As the company has strong interest coverage and a high Alman Z-Score, GuruFocus rated Topre’s financial strength 8 out of 10. Its profitability and growth was rated 7 of 10 as it has an expanding operating margin, a moderate Piotroski F-Score of 4 and a one-star business predictability rating.
Hennessy holds 0.27% of the company’s outstanding shares.
Other trades
Additional new purchases the fund made during the quarter were BIC Camera Inc. (TSE:3048), Kuriyama Holdings Corp. (TSE:3355), Stella Chemifa Corp. (TSE:4109), Nihon Kohden Corp. (TSE:6849), OBIC Business Consultants Co. Ltd. (TSE:4733) and several others.
The current portfolio of 63 holdings is largely invested in the industrials sector, followed by technology and consumer cyclical stocks. According to its fact sheet, the fund outperformed its benchmark, the Russell/ Nomura Small Cap Index, in 2017 with a return of 49.58%. The index posted a 35.34% return.
Disclosure: No postions.
