Uguisu Value Q2 Updates

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Looking for Japanese smaller cap stock ideas? The Q2 edition of Uguisu Value publishes this weekend [update: published May 14]. If you’re new to my website or if you’ve been considering subscribing, now is a timely opportunity to receive updates on the 5 best ideas published to date and 3 new watch-list ideas. For important background on the newsletter see this newsletter link or click via the left menu and you can also scroll below for past posts. In short, Uguisu Value is focused on small and micro cap Japanese stocks trading at significant discounts whether or both to net asset value and/or earning power.

Four of the five best ideas remain very attractively valued and as is common with value investing can be trying on the patience of investors — they have all increased their book values and three of them trade at an even bigger discount to market value. The lone exception has encountered unexpected operating challenges that have resulted in lower revenues and a sharp drop in profitability, but the company/management has a strong track record, solid balance sheet, and there is a very valuable fixed asset component.

More details of these five companies with their latest earnings updates as well as three watch-list ideas appear in the Q2 edition of Uguisu Value.

Email: contact@steventowns.com to request a sample or for how to subscribe.

Investing in Banks?

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Check out Oddball Stocks for details of a book about investing in banks in the works that Nate Tobik is co-authoring. A sample chapter (about whether bank stocks are risky) is available there for download. I enjoyed it and highlighted the following, which supports a couple of key points the authors make in the chapter about investment opportunities with banks:

In 2012, a rogue trader (nicknamed by the media as the “London Whale”) at JP Morgan caused a loss of $6.2b. JP Morgan was able to absorb this loss and move forward without an impact to their business. Consider that of the 6,279 banks in existence in the US at the end of Q3 2015 only 177 had more than $6b in total assets. The London Whale made three bad trades that in the aggregate lost more money than 97% of the banks in the US hold in assets on their balance sheets.

Separately, the Heard of the Street section of the WSJ is often a good source of interesting statistics and commentary. For example, in the Thursday 3/10 edition, Aaron Back describes how banks have been preparing for higher rates by classifying more and more (debt) securities to “held to maturity” instead of “available for sale.” The so-called big four U.S. banks’ held-to-maturity holdings have increased from under 5% in 2011 to approaching 20% by year end 2015. Interest rates, however, at least presently, have not reciprocated. It sounds like a little FIFO, LIFO shifting. Very interesting to think about the various implications and juxtapositions of capital cushions / distressed debt levels / whether oil and gas companies will further tap credit lines / potential broader slowdown in CRE / health of auto loan and lease payments / student loan repayments and loan securitization/syndication and etc.

There is excess capacity in too many areas (and not just commodities). Reinsurance, for example. Retail real estate spinoff dreams, for another (the Sears and Macy’s locations I’ve seen are fairly typical in their feeling quite dated and needing serious renovations while leaving me scratching my head about who would actually want to lease or own stores other than Amazon). Not to mention consumer electronics, which is one area where it’s easy to understand how Japan (a longtime investment focus of mine) has struggled to remain relevant on a global scale: far too much domestic capacity where intense competition and me-tooism hurts profit margins, not to mention the overall glut when including global capacity from companies in China, South Korea and Taiwan, making meaningful differentiation near impossible and commodifying nearly everything. Perhaps almost the same can be said about investing in Banks in Japan. And even the global investment banks leading up to 2008 and for many the ongoing struggles today.

There’s a sort of natural Batesian mimicry in business and investing with one too many geniuses (and unfocused/undisciplined companies) masquerading as value-creators while in fact serving as a drag, ultimately, on pricing power and profit margins for the industry (and securities markets) at large. In some ways, consumers may benefit (and especially some patient and disciplined value investors) as prices come down, although there is often plenty of collateral damage or negative externalities by association.

Let me end by saying I like Nate’s approach with the smaller banks and oddball companies among which we are more likely to find simplicity (e.g. balance sheets), focus (one core or a limited number of profit drivers) and less competition (e.g. more attractive market valuation at time of purchase or accumulation). I haven’t commented about my newsletter in awhile — suffice it to say the rather obscure Japanese smaller caps are necessitating the aforementioned patience and discipline, which I believe is now essentially a matter of arbitraging time to realize value. I hasten to add however, as a I said recently to a friend, that opportunity cost may prove to be a bitch in some cases!

Uguisu Value to feature net-net in first ed. of 2016

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Update 31 Jan. 2016: The first 2016 edition of Uguisu Value has been published and emailed to subscribers. See latest details in original post below. Note also the new one-time subscription offer for investors that would like to gain access to the current issue featuring a net-net and the three other issues from 2015 (the maiden issue has been available as a free full sample).

Original post:

2015 proved to be a difficult year for many value investors, Uguisu Value (focused on value investing in Japan) included. While the four best ideas in Uguisu Value all achieved near-term upside, they all managed to end the year below their share prices compared to the time of publishing. At 3 of the 4 companies, their intrinsic value has grown, so the value gap has also widened.

With patience (acknowledging opportunity cost meantime) and an ability to arbitrage time (it would be great, yes, if value is realized in 15 or 18 months rather than 24 months or more), I continue to expect significant upside potential supported by solid assets and ongoing profitability.

For 1 of the 4 companies, its operating environment has intensified drastically. However, it has owner managers, a patient value investor as its largest shareholder and a strong balance sheet (without giving away too much information, it has a real estate development whose value approximates the company’s market capitalization).

For potential subscribers to Uguisu Value, note the following:

  • the first edition of 2016 is scheduled to be published on Sunday, Jan. 31
  • this first edition of ’16 will feature a profitable Japanese company whose cash along with investment securities and investment real estate (minus all liabilities) exceeds its market capitalization; a net-net by this definition (not a 2/3 NCAV, but a massively undervalued co. also on NAV basis)
  • new subscribers get free access to the 4 best ideas from 2015
  • for more background on Uguisu Value see: http://steventowns.com/uguisu-value-newsletter/
  • you can request a free full copy of the maiden edition (2015) by emailing contact@steventowns.com

Uguisu Value Newsletter Update

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*Update 10/31: The fourth and final 2015 issue of Uguisu Value published for subscribers’ review over the weekend ahead of the market open in Tokyo (on Monday, November 2nd). See most recent update below or click the Uguisu Value Newsletter link here or in the left-menu area for additional details. 

Previously on 10/7 and 10/15:

Many friends, family members and colleagues agree that 2015 has been flying by and somehow mid October is already just around the corner. For the Uguisu Value newsletter, that means the fourth and final issue of the year will be published soon (current target publish date of month’s end). I launched Uguisu Value in January as a means of offering one deep conviction, heavy portfolio concentration write-up for value investors based around the world seeking smaller-cap Japan equity ideas that feature asymmetric reward v. risk: upside of at least 2x and minimal downside due to solid margins of safety and historical/current profitability.

It has been somewhat of a roller coaster ride with interim upside of 30%+ for two of my best ideas. Presently (updated 10/15), however, share prices of all three are down since publishing: by 5% or less in two cases and about 13% in another. Having thoroughly researched these companies, it is now, essentially, a matter of time arbitrage. Founding subscribers as well as subscribers from Q2 and Q3 have been excellent, demonstrating the indispensable value investor virtue of patience and in some cases as I’m aware, taking advantage of Mr. Market.

I am fully invested in my best ideas and in some cases have sizable allocations. My Japan portfolio typically has less than six positions. If I were managing external permanent (or patient) capital or a private equity investment fund, all three best ideas to-date are ideal acquisition candidates of which I would love to own much larger stakes or outright.

  • For my maiden issue (request a sample via email: contact [@] steventowns.com), I maintain my valuation upside of a baseline 200% correspondingly with a solid margin of safety. This company is the epitome of deep value (rich balance sheet assets) opportunities in Japan. Having written-up two higher-ROE companies subsequently, I look forward to sharing another company whose balance sheet assets alone make it investment worthy, not to mention also being attractive with regards to profitability.
  • My Q2 best idea was among those with 30%+ interim gains, but the company’s stock price has undergone a sharp reversal that is excessive considering the company’s earning power (and history of profitability) and strong balance sheet. I maintain my original 100% upside target, but full value realization may naturally take longer due to the lower valuation from which it must increase. I will be watching the company’s execution in its core business segments and management’s capital allocation decisions (i.e. will there be further share repurchases?) in the coming months and next year.
  • My Q3 best idea is a micro-cap that has made significant investments and is poised for top and bottom-line growth that I expect will drive its valuation higher conservatively by 2x. Execution risk is low (e.g. new warehouse construction is complete; deliberately accumulated inventory is quickly ramping up for sale), while monthly sequential and year-over-year revenues have all been increasing. This is another case of time arbitrage. The valuation is extremely attractive and although it could temporarily decrease somewhat due to exogenous factors such as any China news of late and selling induced by broader market selling, the reward v. risk profile leans (heavily) asymmetrically in favor of the former.

I hope this update is helpful both to those who have been considering subscribing and newcomers to my website that learn of Uguisu Value. Given the ongoing availability of excellent valuations in Japan, I fully expect to continue featuring Japanese smaller-cap equity best ideas into 2016. One of my investing circles-of-competence is this very segment of smaller-cap and domestic/consumer-oriented Japanese companies that have a combination of attractive valuations with growth opportunities or other value-unlocking catalysts. Japan clearly lacks the equity culture found in the U.S., however, as much as efficient markets are found to be inefficient in New York (let alone Japan), the candlestick charting momentum proclivities not uncommon in Japan are also to the advantage of value investors. Furthermore, the seemingly innumerable self-proclaimed macro pundits and Japan experts continue to misunderstand Japan and again that is ultimately to value investors’ benefit.

Link for Uguisu Value additional information: http://steventowns.com/uguisu-value-newsletter/

Email for Uguisu Value maiden issue sample: contact@steventowns.com.

Third issue of Uguisu Value features Japanese micro-cap

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The third issue of Uguisu Value is now available. My best idea featured in this third issue is a micro-cap that I think can easily double over the next year. I continue to find the best value and upside (MOS with 100%-plus upside potential) among Japanese smaller cap companies. Uguisu Value embraces fundamental research, portfolio concentration and looks for asymmetrical (reward/risk) opportunities typically relying on Japanese language sources (also, featured companies may not have English securities filings or financial reports). See this link for subscription details or scroll below for recent updates.

Uguisu Value Newsletter Sample Available

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7/23 update: The 3rd issue of Uguisu Value will be published by this Sunday afternoon ahead of the Monday open in Tokyo. See below for other updates.

7/5 update: The 3rd issue of Uguisu Value will be published later this month. I’ve been monitoring valuations and researching a narrowed selection of companies for the 3rd issue’s feature best idea. I’m excited to finalize and publish the 3rd issue. Meantime, I’m equally excited about the first two best ideas from the first and second issues, which are up 20% and 8% respectively since publishing — since I’m targeting 200%+ upside in the first instance and a baseline double in the second. Details of Uguisu Value are available here. After you have had a chance to see details at the aforementioned link, if you’re interested in a free sample of the first issue of Uguisu Value please request via email: contact@steventowns.com.

*** “Safety in Value” on Seeking Alpha has just published an interview with me. He had excellent questions and was very kind to edit and format them. If you’d like to know more about my background and Uguisu Value, you’ll want to read our interview: http://seekingalpha.com/article/3301795-finding-value-in-japanese-stocks-an-interview-with-steven-towns

5/27 update: Patience and discipline. Multi-year highs in Japan. Not as many interesting (valuation) companies, but still plenty for discerning investors. My best ideas published thus far in Uguisu Value and some of my other core positions remain attractive (not only in terms of potential upside but also given their operating businesses, management, and etc.) despite their higher stock prices. I target baseline 2x opportunities and I manage a highly concentrated portfolio.

4/14 update: As of the Tues. 4/14 close in Tokyo, the featured company in the first issue of Uguisu Value is up 28% since publishing in January. See below to request a full sample copy. The second issue’s featured write-up is down approx. 3% since publishing. With the company currently available at less than a 5% premium to the publish date’s price per share, new subscriptions will begin with the Q2 issue.

3/29 update: I published the Q2 issue of Uguisu Value on 3/29 at around 1:30 pm JST, 12:30 am New York. See below re. Q1 sample and for subscriptions. 

3/21: Japanese stocks have done well in this first quarter (the fiscal third quarter for many in Japan) with the closely watched Nikkei 225 up 12% (+16% from its ytd low). I released the first issue of the Uguisu Value newsletter in mid-January. Details of Uguisu Value are available here. In short, the purpose of the letter is to identify and write-up one best idea (selected from within the Japanese micro and smaller-cap universe) each issue. The premise and inspiration: capitalizing on circle-of-competence and portfolio concentration underpinned by a margin of safety (e.g. Berkowitz, Buffett and Soros among others).

After you have had a chance to see details at the above link, if you’re interested in a free sample of the first issue of Uguisu Value please request via email: contact@steventowns.com. Compared to the deep-value style investment in the first issue, the second one will be more in the moat/compounder category (higher ROE; attractive valuation with growth catalysts; solid MOS) and its market cap is between US$500mn-$1bn. Samples will not be made available for the Q2 and future issues.

Why Value Investing Works

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Here’s an alternative view of why value investing works (see indented quote below). It’s obviously not the only reason, but it strikes me as something that’s likely to perpetuate (at least in the U.S.). I’ll elaborate by adding a generalization that few people read and who knows how much they gain/retain. Thus, for investors, the competition is fundamentally guaranteed to be fairly limited. Combine the above with the interesting studies of Horizon Kinetics (see @HorizonKinetics on Twitter), for example, as well as with the long recognized reasons why value investing works, and our chances are even better yet. Google this post’s title and for those who haven’t seen Tweedy, Browne’s related report, include its name in your search. In last week’s Barron’s editorial, “Commencement Address: On diminishing the value of a college education,” by Thomas G. Donlan, the following excerpt caught my eye:

The U.S. tried this before [reducing “barriers” (to college completion)]. A broad movement arose at the end of the 19th century to bring more Americans to a higher level of education. Fewer than 15% of Americans had graduated from high school, so high school was made into a free entitlement, with lower academic standards. By 1999, 83% of Americans had graduated from high school, but they had to go to college to get something like the education that high school grads received in 1900.

 

John Muir: Food for Thought for Value Investors

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In my last post I talked about how I enjoy reading and like to read as much non-finance material as possible. I have since finished the critique of John Muir’s writing that was published by I assume the now late Univ. of Wisconsin professor Herbert Smith (published in 1965). The following passage by Muir (from John of the Mountains; shared by Smith late in his review) may be applicable today as much as it must have been in his time ~100 years ago. Perhaps this is especially important to keep in mind during bull markets:

No sane man in the hands of nature can doubt the doubleness of his life. Soul and body receive separate nourishment and separate exercise, and speedily reach a stage of development wherein each is easily known apart from the other. Living artificially, we seldom see much of our real selves. Our torpid souls are hopelessly entangled with our torpid bodies, and not only is there a confused mingling of our own souls with our own bodies, but we hardly possess a separate existence from our neighbors. 

Emphasis added. Muir ends this thought by describing his favored means of independence.

The life of a mountaineer seems to be particularly favorable to the development of soul-life, as well as limb-life, each receiving abundance of exercise and abundance of food.

Previously: John Muir: Speaking of the Herd

 

John Muir: Speaking of the Herd

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Outside of work and preparing for the quarterly Uguisu Value newsletter (among plenty of other things going on!) I spend a fair amount of personal time reading. A number of wonderful books for value investors have been published in recent years — most notably I’m thinking of The Manual of Ideas and The Education of a Value Investor. In addition to reading investing books and annual reports, I like to mix in as much non-investing material as I can.

Recently I began reading a critical review of the famous environmental preservationist John Muir’s (1838-1914) writing. Not long after arriving in California, around the age of 30, Muir worked for a short while as a shepherd. He made the following observation about sheep (quote below). I’m sure there are not a few individual investors that end up in this situation with the vicissitudes of “the market” (or as we value investors prefer, “Mr. Market”). Muir’s depiction also reminds me of some of the institutional and HNWI investors that I pitched regarding a small-cap Japan activist fund. Recapitulating the investment merits of profitable companies trading at substantial discounts to tangible assets, to so-called sophisticated investors … while being grilled about macroeconomic risks and the very company-specific characteristics (smaller capitalization, obscurity, etc.) that make value investing attractive. Go figure.

Paraphrasing Muir:

Even sheep that have strayed from the flock huddle timidly and silently, basely human in their actions. Afraid of their freedom, not knowing what to do with it, and seeming glad to get back into their old familiar bondage.

It is worth mentioning that in fact Muir was fond of wild sheep.

Nostalgic for California this past winter, it was fun to see Muir’s name appear in Hampton Sides’ In the Kingdom of Ice. Put that book on your reading list. A character in Sides’ story is a Melville. The joys of being a value investor and not stuck watching stock quotes.

Some thoughts about investing in Japan

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I recently published an exclusive article at Seeking Alpha, “Thoughts About Investing in Japan.” I like how SA has incorporated the summary bullet points atop its posts. I’m posting them below here with the original article linked in the aforementioned title. It’s not easy writing about Japanese stocks on SA when fewer and fewer Japanese ADRs trade in the U.S. (you can’t link Tokyo-listed ordinary shares on the site), let alone the matter that I’m focused on smaller caps. Have a look at the SA article and by the way, if you missed it, I launched a small/micro cap quarterly best-idea Japanese stock newsletter (Uguisu Value) in January.

Summary

  • Nomura’s latest investor survey shows Japanese individuals remain long Japan.

  • Demand for Japanese stocks seen exceeding supply.

  • Most-watched stocks include many usual suspects.

  • Thinking of Soros, Templeton, and Marks for Japan 2015-20.

  • Japanese stock idea generation.