The Hennessy Japan Small Cap Fund (Trades, Portfolio), part of the Hennessy Funds, released its second-quarter portfolio this week, listing seven new positions.
With the goal of long-term capital appreciation, portfolio managers Tadahiro Fujimura and Tetsuya Hirano invest in small-cap Japanese companies. Relying on vigorous research and analysis, the managers look 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 stocks that met this criteria were Macnica Fuji Electronics Holdings Inc. (TSE:3132, Financial), Kasai Kogyo Co. Ltd. (TSE:7256, Financial), Kobe Bussan Co. Ltd. (TSE:3038, Financial), Ef-On Inc. (TSE:9514, Financial) and Nihon Flush Co. Ltd. (TSE:7820, Financial).
Macnica Fuji Electronics
The fund invested in 252,400 shares of Macnica Fuji Electronics for an average price of 2,321.03 yen ($20.86) per share, giving the position 2% portfolio space.
The electronics distributor has a market cap of 113.3 billion yen; its shares closed at 1,813 yen on Monday with a price-earnings ratio of 8.80, a price-book ratio of 0.90 and a price-sales ratio of 0.20.
The Peter Lynch chart below shows the stock is trading well below its fair value, suggesting it is undervalued.
GuruFocus rated Macnica Fuji’s financial strength 7 out of 10, supported by sufficient interest coverage and an Altman Z-Score of 3.47, which indicates good financial health. Its profitability and growth did not fare as well, scoring 4 out of 10. The company is weakened by an operating margin that underperforms 61% of competitors and a poor Piotroski F-Score of 3, which implies poor business operations.
The fund holds 0.4% of the company’s outstanding shares.
Kasai Kogyo
Hennessy picked up 272,900 shares of Kasai Kogyo for an average price of 1,463.45 yen per share, expanding the portfolio by 1.78%.
The interior auto parts manufacturer, which makes cabin trims, sun visors and dash insulators, among other products, has a market cap of 51.11 billion yen; its shares closed at 1,325 yen on Monday with a price-earnings ratio of 6.63, a price-book ratio of 0.84 and a price-sales ratio of 0.23.
According to the Peter Lynch chart below, the stock is undervalued since it is trading below its fair value.
Supported by a strong level of interest coverage, Kasai Kyogo’s financial strength was rated 7 out of 10 by GuruFocus. The company’s Altman Z-Score, however, indicates it is experiencing some financial pressure. The company’s profitability and growth was rated 6 out of 10. While its operating margin is expanding, the Piotroski F-Score of 3 implies poor business operations. The company also has a business predictability rating of one out of five stars. According to GuruFocus, stocks with this rating typically see an average gain of 1.1% per year. The rating is on watch, though, which means conditions in the company’s business or industry could change.
The fund holds 0.71% of the company’s outstanding shares.
Kobe Bussan
The fund purchased 63,800 shares of Kobe Bussan for an average price of 4,591.09 yen per share, allocating 1.43% of the portfolio to the holding.
The supermarket operator has a market cap of 147.57 billion yen; its shares closed at 5,590 yen on Monday with a price-earnings ratio of 16.61, a price-book ratio of 5.18 and a price-sales ratio of 0.58.
Based on the Peter Lynch chart below, the stock appears to be overpriced as it is trading higher than its fair value.
Kobe Bussan’s financial strength was rated 6 out of 10 by GuruFocus, boosted by sufficient interest coverage and an Altman Z-Score of 3.79, which indicates a healthy financial position. The company’s profitability and growth was rated 7 out of 10. While its operating margin is expanding, the company’s Piotroski F-Score is a mediocre 4, meaning its operations are stable. The company also has a perfect business predictability rating of five stars. GuruFocus says companies with this rating typically see an average increase of 12.1% per year and have good earnings and revenue growth.
The Japan Small Cap fund holds 0.24% of the company’s outstanding shares.
Ef-On
Hennessy bought 240,360 shares of Ef-On for an average price of 1,073.11 yen per share, dedicating 1.28% of the portfolio to the position.
The energy service company has a market cap of 27.12 billion yen; its shares closed at 1,264 yen on Monday with a price-earnings ratio of 11.66, a price-book ratio of 2.47 and a price-sales ratio of 2.52.
The Peter Lynch chart below shows the stock is trading below its fair value, suggesting it is undervalued.
Supported by a high level of interest coverage, GuruFocus rated Ef-On’s financial strength 6 out of 10. The company’s Altman Z-Score of 2.32, however, indicates it is experiencing some minor financial pressure. The company’s profitability and growth scored a 7 out of 10 rating. While the company’s operating margin is expanding, its moderate Piotroski F-Score of 4 implies business operations are stable.
The fund holds 1.12% of Ef-On’s outstanding shares.
Nihon Flush
The fund invested in 103,200 shares of Nihon Flush for an average price of 2,552.7 yen per share. The trade had an impact of 1.18% on the portfolio.
The building materials manufacturer has a market cap of 29.87 billion yen; its shares closed at 2,384 yen on Monday with a price-earnings ratio of 12.74, a price-book ratio of 1.65 and a price-sales ratio of 1.44.
According to the Peter Lynch chart below, the stock is undervalued since it is trading below its fair value.
Nihon Flush’s financial strength was rated 8 out of 10 by GuruFocus, supported by a comfortable level of interest coverage and a strong Altman Z-Score of 6.08. The company’s profitability and growth scored a 7 out of 10 rating. The operating margin of 15.33% outperforms 82% of peers, while the Piotroski F-Score of 5 indicates stable operating conditions.
Hennessy holds 0.82% of the company’s outstanding shares.
Other trades
During the quarter, the fund also established positions in Sou Inc. (TSE:9270) and Soiken Holdings Inc. (TSE:2385).
Hennessy’s $215 million portfolio, which is composed of 61 holdings, is largely invested in the industrials sector, followed by technology and consumer cyclical stocks. According to its website, 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 positions.
