The Hennessy Japan Small Cap Fund (Trades, Portfolio) released its first-quarter 2019 portfolio this week, listing six new holdings.
The fund, which is part of California-based Hennessy Advisors, 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.
Based on these criteria, Hennessy established positions in Sanyo Chemical Industries Ltd. (TSE:4471, Financial), Transcosmos Inc. (TSE:9715, Financial), Tosei Corp. (TSE:8923, Financial), Senko Group Holdings Co. Ltd. (TSE:9069, Financial), Star Mica Co. Ltd. (TSE:3230, Financial) and Matsuoka Corp. (TSE:3611) during the quarter.
Sanyo Chemical Industries
The fund’s largest new buy of the quarter was 50,000 shares of Sanyo Chemical for an average price of 5,233.03 yen ($46.95) per share, dedicating 1.51% of the equity portfolio to the holding.
The Japanese chemical manufacturer has a market cap of 116.84 billion yen; its shares closed at 5,300 yen on Wednesday with a price-earnings ratio of 10.93, a price-book ratio of 0.87 and a price-sales ratio of 0.72.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
Sanyo’s financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. In addition to having comfortable interest coverage, the Altman Z-Score of 3.10 indicates the company is in good fiscal health.
Although revenue per share has declined over the last three years, the company is supported by an expanding operating margin, a high Piotroski F-Score of 7, which suggests business conditions are healthy, and a business predictability rank of 2.5 stars out of five. According to GuruFocus, companies with this rank typically see their stocks gain an average of 7.3% per year.
Hennessy holds 0.23% of Sanyo Chemical’s outstanding shares.
Transcosmos
After exiting a position in Transcosmos in the third quarter of 2014, the Japan Small Cap Fund entered a new 86,800-share holding for an average price of 2,432.39 yen per share. The trade had an impact of 1.13% on the equity portfolio.
The Tokyo-based company, which provides business outsourcing services, has a market cap of 93.49 billion yen; its shares closed at 2,254 yen on Wednesday with a price-earnings ratio of 39.03, a price-book ratio of 1.27 and a price-sales ratio of 0.33.
According to the Peter Lynch chart, the stock is overvalued.
Supported by comfortable interest coverage, GuruFocus rated Transcosmos’ financial strength 8 out of 10. The Altman Z-Score of 4.01 also suggests the company is in good fiscal standing.
The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline and returns are underperforming industry peers, Transcosmos is supported by a moderate Piotroski F-Score of 6, which suggests business conditions are stable. It also has a one-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.
With 0.57% of outstanding shares, the IVA International Fund (Trades, Portfolio) is Transcosmos’ largest guru shareholder. Hennessy holds 0.21%.
Tosei
Hennessy invested in 100,300 shares of Tosei for an average price of 958.65 yen per share, allocating 0.59% of the equity portfolio to the position.
The Japanese real estate company has a market cap of 48.34 billion yen; its shares closed at 999 yen per share on Wednesday with a price-earnings ratio of 7.08, a price-book ratio of 0.92 and a price-sales ratio of 0.78.
Based on the Peter Lynch chart, the stock appears to be undervalued.
Tosei’s financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately 25.1 billion yen in new long-term debt over the last three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.10, however, suggests the company may be under some financial stress.
The company’s profitability and growth fared even better, scoring an 8 out of 10 rating. In addition to an expanding operating margin, Tosei is supported by strong returns that outperform competitors, a moderate Piotroski F-Score of 6 and a one-star business predictability rank.
The Japan Small Cap Fund holds 0.21% of the company’s outstanding shares.
Senko Group Holdings
The fund picked up 106,900 shares of Senko Group for an average price of 856.15 yen per share, giving it 0.55% space in the equity portfolio.
The logistics company has a market cap of 139.92 billion yen; its shares were trading around 921 yen on Wednesday with a price-earnings ratio of 12.98, a price-book ratio of 1.18 and a price-sales ratio of 0.29.
The Peter Lynch chart suggests the stock is undervalued.
Senko’s financial strength and profitability and growth were both rated 6 out of 10 by GuruFocus. While the company has sufficient interest coverage, the Altman Z-Score of 2.39 indicates it is under some fiscal pressure.
Although the company’s Piotroski F-Score of 3 indicates business conditions are poor, it is supported by an expanding operating margin, returns that outperform industry peers and consistent earnings and revenue growth. Senko also has a three-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 8.2% per year.
Hennessy holds 0.07% of the company’s outstanding shares.
Star Mica
The portfolio managers purchased 64,700 shares of Star Mica for an average price of 1,602 yen per share, expanding the equity portfolio 0.54%.
The real estate company has a market cap of 29.62 billion yen; its shares closed at 1,625 yen on Wednesday with a price-earnings ratio of 14.33, a price-book ratio of 1.80 and a price-sales ratio of 1.12.
According to the Peter Lynch chart, the stock is trading near its fair value.
GuruFocus rated Star Mica’s financial strength 5 out of 10. Although the company has adequate interest coverage, the Altman Z-Score of 2.25 suggests the company is under some fiscal pressure.
The company’s profitability and growth scored a 6 out of 10 rating, driven by operating margin expansion and returns that outperform competitors. On the other hand, the low Piotroski F-Score of 3 indicates poor business conditions.
The Japan Small Cap Fund holds 0.35% of the company’s outstanding shares.
Matsuoka
The fund bought 29,400 shares of Matsuoka for an average price of 3,020.08 yen per share, impacting the equity portfolio by 0.47%.
The apparel manufacturer has a market cap of 36.1 billion yen; its shares closed at 3,615 yen on Wednesday with a price-earnings ratio of 18.36, a price-book ratio of 1.77 and a price-sales ratio of 0.57.
Based on the Peter Lynch chart, the stock appears to be slightly overvalued.
Matsuoka’s financial strength was rated 7 out of 10 by GuruFocus. Supported by sufficient interest coverage, the Altman Z-Score of 3.52 suggests the company is in good fiscal standing.
The company’s profitability and growth did not fare as well, scoring a 4 out of 10 rating as a result of margins and returns underperforming industry peers.
Hennessy holds 0.29% of Matsuoka’s outstanding shares.
Additional trades
The portfolio managers also expanded several holdings during the quarter, including Benefit One Inc. (TSE:2412), Ship Healthcare Holdings Co. Ltd. (TSE:3360), Kawada Technologies Inc. (TSE:3443) and Kito Corp. (TSE:6409), among others.
The Japan Small Cap Fund’s $159.37 million equity portfolio, which is composed of 61 stocks, is heavily invested in the industrials sector, followed by technology and consumer cyclical. According to its fact sheet, the fund posted a return of -12.51% in 2018, outperforming the Russell/Nomura Small Cap Index’s -18.12% return and the Tokyo Stock Price index, which returned -14.30%.
Disclosure: No positions.
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