The Hennessy Japan Small Cap Fund (Trades, Portfolio), part of the Hennessy Funds, disclosed it established two new positions and closed another when it released its third-quarter portfolio.
Fund managers Tadahiro Fujimara and Tetsuya Hirano invest in small-cap Japanese companies to achieve long-term capital appreciation. 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.
During the quarter, the fund established positions in Nishimoto Co. Ltd. (TSE:9260, Financial) and Tokyo Rope Manufacturing Co. Ltd. (TSE:5981, Financial). It exited its Sou Inc. (TSE:9270, Financial) holding.
Nishimoto
The fund invested in 71,600 shares of Nishimoto for an average price of 5,246.38 yen ($46.06) per share, dedicating 1.56% of the equity portfolio to the holding.
The food distributor has a market cap of 75.07 billion yen; its shares closed at 5,230 yen on Monday with a price-earnings ratio of 19.18, a price-book ratio of 1.51 and a price-sales ratio of 0.41.
The Peter Lynch chart shows the stock is trading higher than its fair value, suggesting it is overpriced.
Supported by good interest coverage and a high Altman Z-Score of 5.2, Nishimoto’s financial strength was rated 8 out of 10 by GuruFocus. The company’s profitability and growth scored a 3 out of 10 rating as a result of poor margins and returns, though its operating margin outperforms 59% of competitors.
Hennessy holds 0.5% of the company’s outstanding shares.
Tokyo Rope
Having previously sold out of Tokyo Rope in the third quarter of 2011, Hennessy established a new 74,000-share holding for an average price of 1,917.12 yen per share. The position was given 0.53% space in the equity portfolio.
The company, which makes wire ropes and steel cords, has a market cap of 22.15 billion yen; its shares closed at 1,374 yen on Monday with a price-earnings ratio of 10.34, a price-book ratio of 0.89 and a price-sales ratio of 0.36.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated Tokyo Rope’s financial strength 5 out of 10. While the company has sufficient interest coverage, its Altman Z-Score of 1.28 indicates it is at risk of going bankrupt. The company’s profitability and growth scored a 4 out of 10 rating as a result of poor margins and returns. The company also has a moderate Piotroski F-Score of 5, which suggests operations are stable, and a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stock prices gain an average of 1.1% a year. The rank is on watch, however, as the company’s revenue per share is in decline.
The fund holds 0.46% of the company’s outstanding shares.
Sou
After establishing a position in the second quarter, the fund divested of all 29,800 shares of Sou for an average price of 5,633.69 yen per share. The trade had an impact of -0.66% on the equity portfolio. GuruFocus estimates the fund lost 3.68% on the investment.
The retailer of second-hand fashion and accessories, which recently went public, has a market cap of 45.21 billion yen; its shares closed at 7,450 yen on Monday with a price-earnings ratio of 30.16 and a price-book ratio of 8.2.
Based on the Peter Lynch chart, the stock appears to be overpriced.
Supported by good interest coverage, Sou’s financial strength was rated 6 out of 10 by GuruFocus. Despite having strong margins and returns, however, the company’s profitability and growth scored a 3 out of 10 rating. GuruFocus warns the company’s dividend payout ratio is too high, meaning it may not be sustainable, and its inventory is building up, suggesting it is having trouble selling its goods.
No other gurus are invested in the stock.
Other trades
During the quarter, the fund also added to a number of holdings, including NS Solutions Corp. (TSE:2327, Financial), Benefit One Inc. (TSE:2412, Financial), Sato Holdings Corp. (TSE:6287) and Soiken Holdings Inc. (TSE:2385). It also trimmed its Digital Garage Inc. (TSE:4819), Kakaku.com Inc. (TSE:2371) and Tonami Holdings Co. Ltd. (TSE:9070) positions, among others.
The fund’s $223 million portfolio, which is composed of 61 stocks, is largely invested in the industrials sector, followed by technology. 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.
