It has been a little more than one year since the last update on my Japanese stocks. I have made a number of changes since then and will briefly discuss the current Japanese basket.
Currently there are nine companies in the basket. I no longer own the two companies I first invested in: I sold Riken Keiki (JP:7734) a while ago after it had a nice run and I found a few companies that looked cheaper. Earlier I sold Maruzen (JP:5982) for the same reasons.
These are the additions I made since the last update:
Isamu Paint (JP:4624)
My favorite net-net in Japan. Isamu Paint produces paints, thinners and other products for automobile repair use, industrial use and construction use. The market cap of the company is just ¥4.6bn (about $45m). Revenues and net income have grown steadily over the last five years and the company also produces free cash flow. The dividend is small at just 2.1%, but the company has bought back stock in fiscal 2013 and 2014 (¥85m and ¥127m respectively).
Isamu Paint is trading at 0.39x BV and a P/E of 6. It has ¥6.8bn in cash and long-term investments against just ¥4.2bn in liabilities. Even though the stock has moved up a bit from where I purchased, I still think this is probably the most attractive stock in the basket currently.
Okayama Paper Industries (JP:3892)
This manufacturer of paper boards is the only loser in the Japanese portfolio at the moment. Its capitalization is tiny at ¥2.3bn. Revenue has been in a downward trend in the last couple of years and profits have dropped as well. Still, at 0.30x book value and with ¥4.0bn in cash and investments on the balance sheet it is a true book value bargain.
In the previous update I already questioned whether buying book value bargains is the best strategy for investors in Japan. The stocks that have done the best for me so far have mainly been the ones that have increased their dividends or repurchased stock.
I’m still holding on to Okayama Paper Industries though. I give them some extra credit, because they did repurchase some stock in FY 2013 and 2012, which is pretty rare for a small cap Japanese company. In 2014 they did not repurchase. The company is still generating some free cash. The stock yields 3.2% and is paying at least a little bit while I wait to see if things improve.
Another new position compared to the last update and another small cap at a market cap of ¥2.6bn. The company provides building security services and cleaning services. Hakuseisha is trading at 0.40x book value and at a discount to cash & investments minus all liabilities. Earnings have been stable and the P/E multiple is 9. The dividend is 3.1%, but unlike Isamu and Okayama Paper this company has not repurchased shares in recent years.
Global Food Creators (JP:7559)
Global Food Creators has performed great so far in 2014 and is up 26%. I don’t know why. The market cap now stands at ¥7.3bn, which is still just below 0.50x BV. The company is very cash-rich with ¥8.4bn in cash and investments against just ¥2.9bn in liabilities. It generates a good amount of free cash flow, but unfortunately there have been no repurchases and the dividend is also small at just 2.0%. The company is not cheap on an earnings basis as the P/E ratio is 16.
KG Intelligence (JP:2408)
Is trading at just below 8x earnings and has a ¥3.6bn market cap. The company publishes various information magazines for weddings, housing, recruitment and… fishing. This is a small position in the basket. This stock trades in 100 share lots which means that at the current share price of ¥503 you need just around €370 or $500 for a minimum purchase. This makes KG Intelligence a good vehicle for reinvesting dividends, provided you have a low cost broker like IB that doesn’t charge you much for Japanese trades.
KG Intelligence is trading right around net-cash value. Revenues and profits have been pretty stable and the stock yields 2.9%.
KSK Co (JP:9687)
KSK is active in software development and the design of hardware systems. Like KG Intelligence this is a small position in the portfolio that I originally established by reinvesting dividends. The stock has performed well this year and is up 23%. KSK is trading at 0.60x book value and has a lot of excess cash. They have bought back a small number of shares in FY 2012 and 2011. The dividend is 2%.
Others: Maezawa Kasei Industries (JP:7925), Alps Logistics (JP:9055), Sugimoto (JP:9932)
I’ll just lump these three together since they were already part of the portfolio last year and not much has changed since then. You can read a brief discussion about them here. As a group I think these three stocks are up around 10% since the last update, a reasonable performance but not spectacular by any means.
At nine positions the basket is more diversified than last year and I’m now less likely to get very lucky or unlucky results in terms of the performance of the basket as a whole. I think the portfolio will do well over time. At these valuations it seems hard to lose money on these stocks. Japan has all sorts of structural problems and poor corporate governance, but I feel that is more than priced in at this point. I heard James Grant in an interview recently and in the context of Russian stocks he said something like: an improvement from terrible to bad can have much greater upside than an improvement from good to great. I think the same is true for Japanese stocks.
Disclosure: long Isamu Paint, Okayama Paper Industries, Hakuseisha, Global Food Creators, KG Intelligence, KSK Co, Maezawa Kasei Industries, Alps Logistics and Sugimoto. No positions in Maruzen and Riken Keiki.