Japanese Basket

[mjohn707]

Despite the Nikkei being at something like a 21 year high, I think there are still some decent values in Japanese small caps.  I recently flipped through the entire Autumn 2017 edition of the Japan Company Handbook (which took me about two months for the 1800+ pages) and I made 13 investments.  A twitter follower (@valuewolf) tipped me on 3 of the 13.

 

I believe that deep value Japanese small caps presently have a number of risks over and above your average US based small cap value, namely that you usually can’t get English language financial disclosures, you’re taking currency risk, management is possibly less shareholder orientated, you generally get poor liquidity and high trading costs, and undervaluation can seemingly persist for longer than it does in other markets. 

 

Despite these issues, I think a diverse basket of Japanese statistical bargains are a reasonable investment at current prices with a pretty protected downside.  Just as a warning, the extent of the research I did on these names was reading the listing in the Japan Company Handbook and reviewing a few years of financial data in translation.  Any sort of situation that I wouldn’t catch just with that I can promise I didn’t.  Just wanted to point out that additional risk, and with that out of the way, here are the names.  Also prices may be a bit out of date, but I don’t think anything has moved a ton either up or down since I invested

 

1. 5918:JP Takigami Steel @ 5560 yen.  Trades about 60% of cash and investments less all liabilities.  Has a poor earnings history, some hair with a price fixing scandal a few years ago

 

2. 6303:JP Sasakura Engineering @  2549 yen.  Maybe 60-66% of Graham style liquidating value depending on inventory mark, poor earnings history, may have an inventory issue

 

3. 6346:JP Kikukawa Enterprise @ 288 yen.  Trades about 66% of cash and investments less all liabilities.  Has a decent earnings history, about 75% of the company’s assets are cash and investments

 

4. 6930:JP Nippon Antenna @ 665 yen.  Maybe 60% of liquidating value, has a poor earnings history, but pays a dividend and has repurchased shares

 

5. 6964:JP Sanko @ 505 yen.  About 66% of liquidating value, poor long term earnings history but recently better.  Pays a dividend and has repurchased shares

 

6. 7229:JP Yutaka Giken @ 2590 yen.  Auto part supplier 70% owned by Honda.  Trades about 50% of book value and at a PE of around 7.  Has a well established and stable earnings record, decent balance sheet, and pays a dividend

 

7. 7314:JP Odawara Auto-Machine Manufacturing @ 638 yen.  Trades at about 66% of cash and investments less all liabilities, pays a dividend, has a mixed earnings record

 

8. 7937:JP Tsutsume Jewelry @ 2140 yen.  Money losing but below liquidating value.  Management has large ownership stake, lots of cash, has repurchased 12% of shares since 2015.  The company previously had a good earnings history

 

9. 8144:JP Denkyosha Co @ 1445 yen.  36% of book value, which is mostly rental real estate, securities, cash, and a long term bank deposit.  The business is profitable and has a reasonable ROIC, stable and established earnings record

 

10. 8191:JP Hikari Furniture @ 5000 yen.  50% of rental real estate valued at a 7.5% cap rate plus cash, less total liabilities.  Profitable and pays a small dividend, but very illiquid.  At the current price the company trades at a large discount to the historical cost of the rental real estate

 

11. 6466:JP Toa Valve Engineering @ 1299 yen.  66% of liquidating value, profitable now, but previously had a good earnings history (@valuewolf)

 

12. 7501:JP Tiemco @ 591 yen.  52% of liquidating value and about 30% of book value.  Poor earnings history, but very statistically cheap (@valuewolf)

 

13. 9885:JP Charle @ 521 yen.  66% of liquidating value, some small profits.  Most of the assets are cash and investments.  (@valuewolf)

 

[writser]

Thanks for the list! Will look into it. Sold some Japanese stocks than ran up last year, could use a few new ones. If I remember correctly you own many more Japanese stocks, right?

[mjohn707]

Thanks for the list! Will look into it. Sold some Japanese stocks than ran up last year, could use a few new ones. If I remember correctly you own many more Japanese stocks, right?

 

I only have a few of my old positions left no, I’ve been selling them as they’ve run up

[cobafdek]

Thanks for your work and for posting your list.

 

I believe that deep value Japanese small caps presently have a number of risks over and above your average US based small cap value, namely that you usually can’t get English language financial disclosures, you’re taking currency risk, management is possibly less shareholder orientated, you generally get poor liquidity and high trading costs, and undervaluation can seemingly persist for longer than it does in other markets. 

 

Despite these perennial concerns, I've had a Japanese basket for the past 3+ years.  So far, the results are satisfactory or better (>70% total return when counting sells that ran up suddenly).  I had no access to 10K type of reports, or any meaningful news reports.  Too lazy even to use Google Translate.

 

As you know, Graham in Security Analysis recommended looking for other qualitative factors to filter out stocks that pass an initial net-net screen.  For my Japanese basket, I filtered out those that had declining revenue over the past 10-15 years, declining book value, and rapidly increasing shares outstanding.  My predetermined sell price was based on reversion to the mean:  sell when net-net, book, PE, or free cash flow value approaches or exceeds what was achieved in the prior 10-15 years.

It was very simple, possibly too simpleminded.

 

Because of my filter, I'm passing on everything on your list, although I am very tempted.

 

What were your statistical or other filters you used to make you final selections?  How have your selections worked out?  If the info is handy, I'm specifically interested to hear how stocks you selected that didn't pass my filters worked out.

 

Thanks.

[mjohn707]

Thanks for your work and for posting your list.

 

I believe that deep value Japanese small caps presently have a number of risks over and above your average US based small cap value, namely that you usually can’t get English language financial disclosures, you’re taking currency risk, management is possibly less shareholder orientated, you generally get poor liquidity and high trading costs, and undervaluation can seemingly persist for longer than it does in other markets. 

 

Despite these perennial concerns, I've had a Japanese basket for the past 3+ years.  So far, the results are satisfactory or better (>70% total return when counting sells that ran up suddenly).  I had no access to 10K type of reports, or any meaningful news reports.  Too lazy even to use Google Translate.

 

As you know, Graham in Security Analysis recommended looking for other qualitative factors to filter out stocks that pass an initial net-net screen.  For my Japanese basket, I filtered out those that had declining revenue over the past 10-15 years, declining book value, and rapidly increasing shares outstanding.  My predetermined sell price was based on reversion to the mean:  sell when net-net, book, PE, or free cash flow value approaches or exceeds what was achieved in the prior 10-15 years.

It was very simple, possibly too simpleminded.

 

Because of my filter, I'm passing on everything on your list, although I am very tempted.

 

What were your statistical or other filters you used to make you final selections?  How have your selections worked out?  If the info is handy, I'm specifically interested to hear how stocks you selected that didn't pass my filters worked out.

 

Thanks.

I think I first invested in Japan in 2014 or thereabouts after I read “Investing in Japan”, by Steven Towns (@activeinvesting on Twitter), which I think I saw mentioned on oddballstocks.  Most of my results since then have been reasonable, part of that is more than likely due to the new highs the Japanese markets have been making I'm sure.

 

I reread the common stock portion of the 1940 edition of Security Analysis during the course of my pass through the handbook.  Graham is always interesting even when he’s discussing topics that have passed into history a long time ago, but the state of the equity markets in the US in 1940 and the Japanese Markets do seem to have some strange symmetries. 

 

I think it’s difficult to be very clever about statistical investments.  I would bet, based on nothing but prejudice and a little experience in investing (and in my primary occupation), that the more filters of that sort you applied to a basket of statistically cheap stocks the worse you’d do on average compared to the full set of unfiltered cheap stocks. 

 

I think part of what we’re looking for with these things is the randomness and the free speculative value, and I think the wider the set the more room we have to let these factors play out as they usually will over time.  I feel quite confident about this even though I don’t have any compelling direct evidence that it’s true, so take it for what it’s worth.  I don’t think I know what filters will optimize returns and I don’t think that you know it either, although I could be wrong about this. 

 

We all have things that we like to see in investments, but I think that some of it is just prejudice and not rigorous when it comes to these statistical types of investments where we’re working with incomplete information.  I tried to eliminate any bias of this type that I might have brought to the situation and so I just purchased things that were cheap based off of assets, earnings, or liquidation value.  I believe in a big basket let’s just say.

 

You can check on some of the other Japanese ideas I wrote up on the Investment Board, just sort it by author and look under my name.  I wrote up a few ideas that all seemed to do okay, and I also invested in a bunch of others that were originally mentioned by West and a few different authors

 

 

 

[cobafdek]

I think it’s difficult to be very clever about statistical investments.  I would bet, based on nothing but prejudice and a little experience in investing (and in my primary occupation), that the more filters of that sort you applied to a basket of statistically cheap stocks the worse you’d do on average compared to the full set of unfiltered cheap stocks. 

 

I think part of what we’re looking for with these things is the randomness and the free speculative value, and I think the wider the set the more room we have to let these factors play out as they usually will over time.  I feel quite confident about this even though I don’t have any compelling direct evidence that it’s true, so take it for what it’s worth.  I don’t think I know what filters will optimize returns and I don’t think that you know it either, although I could be wrong about this. 

 

We all have things that we like to see in investments, but I think that some of it is just prejudice and not rigorous when it comes to these statistical types of investments where we’re working with incomplete information.

 

I think you are correct with all of this.  Three years ago, I also read Gray and Carlisle's Qualitative Value.  Their message based on results of their backtesting corroborates what you're saying.  They also show that cherrypicking hurts results.

 

Against Gray and Carlisle are the limitations of backtesting, such as not being able to account for transaction costs, etc.  It is also impractical for most small individual investors to invest in all of the hundreds or thousands of stocks that pass the value screen.  I think there are professionally run funds that do this, but I haven't looked too hard into these.

 

That's why I decided to cherrypick, and to rationalize my bias by citing Graham, who was also probably just going by his gut when he advised to consider (unspecified) qualitative factors.  I admit I chose additional filters because it felt more comfortable.  Ultimately, it is subjective.

[mjohn707]

I think it’s difficult to be very clever about statistical investments.  I would bet, based on nothing but prejudice and a little experience in investing (and in my primary occupation), that the more filters of that sort you applied to a basket of statistically cheap stocks the worse you’d do on average compared to the full set of unfiltered cheap stocks. 

 

I think part of what we’re looking for with these things is the randomness and the free speculative value, and I think the wider the set the more room we have to let these factors play out as they usually will over time.  I feel quite confident about this even though I don’t have any compelling direct evidence that it’s true, so take it for what it’s worth.  I don’t think I know what filters will optimize returns and I don’t think that you know it either, although I could be wrong about this. 

 

We all have things that we like to see in investments, but I think that some of it is just prejudice and not rigorous when it comes to these statistical types of investments where we’re working with incomplete information.

 

I think you are correct with all of this.  Three years ago, I also read Gray and Carlisle's Qualitative Value.  Their message based on results of their backtesting corroborates what you're saying.  They also show that cherrypicking hurts results.

 

Against Gray and Carlisle are the limitations of backtesting, such as not being able to account for transaction costs, etc.  It is also impractical for most small individual investors to invest in all of the hundreds or thousands of stocks that pass the value screen.  I think there are professionally run funds that do this, but I haven't looked too hard into these.

 

That's why I decided to cherrypick, and to rationalize my bias by citing Graham, who was also probably just going by his gut when he advised to consider (unspecified) qualitative factors.  I admit I chose additional filters because it felt more comfortable.  Ultimately, it is subjective.

I haven’t read Quantitative Value, but there were also some papers published by Tweedy Brown that had some backtesting information about statistical investing that I took a look at a few years ago.  The problem I have with this stuff is I don’t feel like I know enough statistics to understand their conclusions other than the very basic return sort of calculations, so that’s as much of their conclusions that I’m willing to put into actual practice. 

 

I understand we’re basically in agreement then on all of this, all I’ll add is that in Japan I don’t think we’re generating enough statistical values at this market level to justify much cherrypicking.  And if I had to cherrypick because of the sheer numbers of investment opportunities, I would do it randomly instead of emphasizing what factors I though would generate a higher returns, assuming pricing was similar.  I don’t think we have enough information to do otherwise.

 

In regards to Graham, from memory I believe that in the liquidating value chapters of Security Analysis he gives examples of companies that are losing money currently, have declining sales, declining book values, and even declining liquidating values.  It always struck me how few guidelines he gives considering how detailed orientated he was as demonstrated by the various investment case studies he outlines throughout the book. 

 

I do think Graham is often enigmatic and knows more than he’s telling us, although I believe it’s at least in part because he thinks certain things aren’t scientific enough for what was basically a textbook that was supposed to be universally useful for the profession.  In this particular section however, I don’t believe he’s trying to be obscure, I think he suspects that too many qualifications outside of price are not going to help investment returns in investments in securities priced this low.  This is only my suspicion however

 

[rukawa]

You have a large number I've invested in and a few I've never seen. I have a couple not on your list that are still cheap:

 

FUJIX Ltd  3600

FUNAI ELECTRIC CO.,LTD  6839

 

Although its been posted on other threads I thought I would remind people that Japan Express provides translated Japanese financials

https://www.kaijinet.com/jpExpress/Default.aspx?f=company&cc=5918

 

I recently flipped through the entire Autumn 2017 edition of the Japan Company Handbook (which took me about two months for the 1800+ pages)

 

Not sure how much time you spent on this but I just used a screen. I would guess I spent a lot less time and there is a pretty large overlap in the stocks we have. There were a few things I didn't catch but I strongly suspect that the thorough search you did is not worth the additional effort given the limited added benefit compared to screening. My screen is basically a net net one.

 

There is one huge benefit of your search...I now realize that I shoud include certain non-current items as part of my net-net screen like rental properties, investment securites and long term time deposits which hit the non-current asset section.

[mjohn707]

You have a large number I've invested in and a few I've never seen. I have a couple not on your list:

 

FUJIX Ltd  3600

FUNAI ELECTRIC CO.,LTD  6839

 

Although its best posted on other threads I thought I would remind people that Japan Express provides translated Japanese financials

https://www.kaijinet.com/jpExpress/Default.aspx?f=company&cc=5918

Thanks for the tip, will take a look at those two.  Yeah I’ve been using Japan Express to translate the balance sheets as well

[rukawa]

You have a large number I've invested in and a few I've never seen. I have a couple not on your list:

 

FUJIX Ltd  3600

FUNAI ELECTRIC CO.,LTD  6839

 

Although its best posted on other threads I thought I would remind people that Japan Express provides translated Japanese financials

https://www.kaijinet.com/jpExpress/Default.aspx?f=company&cc=5918

Thanks for the tip, will take a look at those two.  Yeah I’ve been using Japan Express to translate the balance sheets as well

 

I've actually got a few other but wasn't sure whether to include them because they have gotten more expensive like:

 

Chuokeizai Sha Holdings

Echo Trading

Mansei Corporation

Sanko Sangyo

Sanko Co

Nichiwa Sangyo

 

But admittedly my research is much less through than even yours is. So Buyer beware.

 

BTW, anyone know how to obtain xbrl for Japanese companies?

Its here:

https://disclosure.edinet-fsa.go.jp/E01EW/BLMainController.jsp?uji.verb=W1E63012CXW1E6A012DSPSch&uji.bean=ee.bean.parent.EECommonSearchBean&TID=W1E63013&PID=W1E63012&SESSIONKEY=1512362339345&lgKbn=1&pkbn=0&skbn=0&dskb=&dflg=0&iflg=0&row=100&idx=0&cal=2&mul=9476&fls=on&mon=&yer=&pfs=4

[mjohn707]

John Henry vs the steam hammer I suppose.  You always do find a few of the weird ones manually though

[mjohn707]

Just to update this, I sold my shares of 7314:JP Odawara Auto-Machine for 950 yen, about a 50% return in a pretty short period of time.  I don't know what's going in in Japan, but the behavior of some of these investments seems way different that what I was used to seeing just a few years ago

[mjohn707]

To update, I sold my shares of 6346:JP Kikukawa Enterprise yesterday for 403 yen, about a 40% return on the purchase price 

[Janeo]

Hi there. First time posting and thought I’d give this topic a little bump given the amount of cheap stuff that surfaced/got cheaper due to the poor performance of the JP market over the past yr.

 

Here’s sharing my holdings in hopes to draw out like-minded investors. ;D

 

2055.T NICHIWA SANGYO CO LTD

3426.T ATOM LIVIN TECH CO LTD

3892.T OKAYAMA PAPER INDUSTRIES CO

4624.T ISAMU PAINT CO LTD

5900.T DAIKEN CO LTD

5951.T DAINICHI CO LTD

5983.T IWABUCHI CORP

6466.T TOA VALVE ENGINEERING INC

6648.T KAWADEN CORP

6943.T NKK SWITCHES CO LTD

6964.T SANKO CO LTD

7399.T NANSIN CO LTD

7521.T MUSASHI CO LTD

7559.T GLOBAL FOOD CREATORS CO LTD

7877.T EIDAI KAKO CO LTD

7902.T SONOCOM CO LTD

8144.T DENKYOSHA CO LTD

9885.T CHARLE CO LTD

[Spekulatius]

Interesting list. I own 5965.T (Fujimak) and 9142.T ( Railroad/ real estate). The performance and moves of Japanese stock made very little sense to me, but there are a lot of cheap stocks out there. Overall I have done well over the years on contrarian buys of decent to good business.

[mjohn707]

Hi there. First time posting and thought I’d give this topic a little bump given the amount of cheap stuff that surfaced/got cheaper due to the poor performance of the JP market over the past yr.

 

Here’s sharing my holdings in hopes to draw out like-minded investors. ;D

 

2055.T NICHIWA SANGYO CO LTD

3426.T ATOM LIVIN TECH CO LTD

3892.T OKAYAMA PAPER INDUSTRIES CO

4624.T ISAMU PAINT CO LTD

5900.T DAIKEN CO LTD

5951.T DAINICHI CO LTD

5983.T IWABUCHI CORP

6466.T TOA VALVE ENGINEERING INC

6648.T KAWADEN CORP

6943.T NKK SWITCHES CO LTD

6964.T SANKO CO LTD

7399.T NANSIN CO LTD

7521.T MUSASHI CO LTD

7559.T GLOBAL FOOD CREATORS CO LTD

7877.T EIDAI KAKO CO LTD

7902.T SONOCOM CO LTD

8144.T DENKYOSHA CO LTD

9885.T CHARLE CO LTD

 

Interesting list, appreciate the work.  It's funny that a lot of these names were discussed on the board a few years ago, I bet a lot of them had a nice run up and then sold off again.  The Japanese market is completely mysterious to me

[mjohn707]

To update, 6930:JP Nippon Antenna is up 58% @ 1050 yen from the original 665 yen, and I don't think it would be crazy to reduce or sell at this price.  There have been some good signs with this name being that they completed a tender for a decent amount of shares and have had some operating improvements, and current prices are only just around net working capital and maybe 60% of TBV, but probably worth taking some money off the table at the very least

[Janeo]

Grats! Just to update, added 2 new ones over the past month.

 

6496.T NAKAKITA SEISAKUSHO 

7628.T OHASHI TECHNICA

[mjohn707]

It looks like 8191:JP Hikari Furniture is going private at 6710 yen per share, which is about a 34% return on the purchase price in a bit over a year, at least if I'm reading the filing in translation correctly

[Hielko]

It looks like 8191:JP Hikari Furniture is going private at 6710 yen per share, which is about a 34% return on the purchase price in a bit over a year, at least if I'm reading the filing in translation correctly

Looks like it was delisted a couple of months ago already?

[mjohn707]

It looks like 8191:JP Hikari Furniture is going private at 6710 yen per share, which is about a 34% return on the purchase price in a bit over a year, at least if I'm reading the filing in translation correctly

Looks like it was delisted a couple of months ago already?

 

Yeah, this was a little while ago, just took some time to try to figure out exactly what happened.  It’s easy to miss or ignore press releases when they’re just in Japanese, but I think it’s important to at least try to understand them

[Foreign Tuffett]

Joban Kaihatsu (1782) is a construction contractor based in Iwaki, Japan. Pays a decent dividend, is currently generating solid operating profits, trades at a ~23% discount to NCAV, and, once you factor the investment securities it owns, trades ~39% below enterprise value. 

 

Hat tip to "Blue Tower Asset Management" for this idea.

[Spekulatius]

Are you guys buying just net - net or do you also look into traditional low PE/ “decent business at very low” price stocks as well. Most of the stocks I am looking at have a low valuation, but arn’t net nets.

[Hielko]

I think in Japan you should try to have both, at least that is my strategy. But something that is not just a net-net, but also has a low P/E at the same time. But if you buy something that is nicely growing at has a low P/E ratio, why not? As long as it's very cheap :)

[NeverLoseMoney]

Are you guys buying just net - net or do you also look into traditional low PE/ “decent business at very low” price stocks as well. Most of the stocks I am looking at have a low valuation, but arn’t net nets.

I've mostly stuck to net-nets and businesses trading at extreme discounts to book value. My problem with buying better businesses at low P/E's or free cash flow multiples is mainly the language barrier. It's very difficult to get a good picture about a micro-cap Japanese company by trying to make sense of a Japanese annual report through Google Translate or something. If you're wrong about growth, or that low P/E, your downside can be quite large. I have some profitable, dividend paying companies in my portfolio that are trading at 30%-40% of book value. I'm hesitant to buy something that's trading at say, 7x earnings and 80% of book, because I think in Japan it can easily sell off to 40% of BV if earnings disappoint. Companies can get a lot cheaper than they would typically get in the US or Europe if investors become pessimistic about its prospects.

 

There's some limit that these deep value stocks almost never sink through. I don't think I've ever seen a consistently profitable, dividend paying Japanese company selling below 25% of tangible book value (if you've got any, please post them below!). So I feel relatively safe buying these at 30-40% of BV and doing little analysis due to the language barrier. That doesn't mean that I'll do well of course, but I think I'm unlikely to lose.

 

I've also tried to coattail some activist investors. I don't think any of those positions have worked out well. There's a decent book (bit too long and boring in some spots) about activism in Japan called "Hedge Fund Activism in Japan: The Limits Of Shareholder Primacy": https://www.amazon.com/Hedge-Fund-Activism-Japan-Shareholder/dp/1107672503/. I don't think coattailing foreign activists is a good idea today either. As an example: I think one company I owned (SNT Corp. - 6319.JP) did a share offering in August, 2018 to dilute their large, activist shareholder. Perhaps I misunderstood the transaction and there is another explanation. For those who want to take a look, press releases can be found on the Japanese version of their website: http://snt.co.jp/jpn/, but not on the English version. Apparently they sold ~835k shares to "improve distribution and liquidity of their stock" (Google translate). I believe there was a "purchase limit" of 400 shares per customer. The company was already swimming in cash, of course. So I don't think much has changed in terms of the treatment of activists.