How My Quant Stocks Fared Since 12 September 2019

Summary

• For subscribers of my Marketplace newsletter I discuss good stocks based on quantitative rankings twice a month.
• In this article I share information on 10 stocks discussed in a newsletter from 2 years ago. While some information is outdated most information can still be useful.
• I will also do a quick follow up on each stock. In particular I compare them with recent quantitative stock rankings. Several stocks are still cheap.

Need recent ideas? For more information on my global quantitative stock research see here.

Nearly 2 years ago I discussed 10 stocks for my subscribers. 4 of them I added to my Selected Stocks list. I moved each of these 4 selected stocks to my Played Out list. I have computed returns in US dollars for these 4 stocks:

Returns for 4 selected stocks (source: own computations)

Stock prices are split and dividend adjusted. I have also computed returns for the other 6 stocks, that I did not think were as good investments as the 4 stocks above:

Returns for 6 other stocks (source: own computations)

Unfortunately I did not add any alpha compared to the 6 stocks I did not pick. There are 3 reasons. First, I had back luck with the 2 Hong Kong stocks. Fundamentals for these stocks deteriorated much. Second, I was too picky. I was not fully aware yet how profitable nanocaps like Windeln.de SE, Ikuyo Co and UMT United Mobility Technology can be. I chose only 2, CytRx and Hong Kong Food Investment Holdings. These 2 stocks had an average annualized return of more than 25%. I should have chosen all 5 nanocaps to have a better chance on a good return. Third, the return on volatile UMT United Mobility was also higher because the end date happened to be exactly at the top. At the end of October 2020 it was back to below €7.

When I had chosen all 5 nanocaps and had been less lucky with the exit price of UMT United Mobility, for example €8 instead of €12.5, my return would have been much higher. In that case 7 picks (including Biogen Inc and Alco Holdings) would have delivered 28.9% average annualized return.

The following stock is still cheap: Ikuyo Co (ticker 7273 in Tokyo). At 1313  JPY per share it is among the best 13% in my nanocaps list.

See below for the descriptions of each stock from 2 years ago with a short update explaining why I consider each stock is still cheap or expensive.

Because of the time difference between research and publication the prices mentioned in the tables below are different from the prices I use for computing returns.

1. Alco Holdings: net-net, 5-year low, update

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
HKG:328 1	0.39 HKD 0.019 HKD	282 HKD 188 HKD	- 0.12	0.21 0.22	3.3 2.6
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-03-31	-540 HKD	-202 HKD	-249 HKD	-	-

September 2019: Alco Holdings manufactures consumer electronics such as audio, video and tablet products. A new business segment is commercial laptops and personal computer for example for the VAIO brand. Revenue from this new business segment is still small but strongly increasing. At the same time revenue from the conventional products is declining, in fact seems to be in a free fall. At the moment sales are mostly in the US but the company wants to sell more in other countries.

See the segment analysis. Both business segments suffer from heavy losses. Dependence on a single customer is extremely large with about 80% of the revenue from this customer.

Searches on the company name and keyword “fraud” did not reveal any relevant information. Between December 2008 and June 2016 this was David Webb’s hot stock. He increased his stake gradually: in 2016 he owned 10%. From that moment the stock price went downhill. But I do not think he sold much since 2016. See also my previous report on the stock from March 2017.

According to the cash flow statements in my screener the company paid a dividend in each of the last 10 years. The dividend paid in the last reporting year was still 0.05 HKD but the company will not pay a dividend over the year ending on March 31, 2019. The company did a small but still substantial dilution 9 years ago and a substantial dilution last reporting year. The latter dilution was a heavily oversubscribed rights issue in December 2018. Most of the proceeds are meant for development of the laptop business and for sales and marketing of such products.

To put this dilution into perspective: during the last 10 years the company raised less than 200 million HKD from selling new shares. Most of this was 123 million HKD from the rights issue in December 2018. But during the last 10 years it paid out over 1.25 billion HKD in dividends: more than 4 times the current market cap. That said, the company paid 550 million HKD of dividend in the year ending on March 31, 2017. That dividend was funded by 534 million HKD of proceeds from a sale and lease back construction in January 2016.

The controlling shareholders are the family Leung with 2 brothers in the board. One of them is both CEO and chairman (red flag). Recently their father, the founder and controlling shareholder, passed away. He retired from the board on june 15, 2018. I do not expect his death to trigger any strategy changes.

See the annual report over the year ending on March 31, 2019. Key audit matters were among others the provision of 153 million HKD for obsolete and slow moving inventories. In 2018 this provision increased by 33 million HKD. There was also an impairment of 20 million HKD on Property, Plant and Equipment and 22 million HKD on intangible assets. So in total 75 million HKD of impairments.

Retained earnings are 1.258 billion HKD including 481 million HKD of other reserves. I think these other reserves are currency translation gains and losses and other comprehensive income and loss. So Market cap/Retained Earnings = 282/1258 = 0.224. However retained earnings just over the last 8 years were negative, because of the dividends.

The balance sheet is strong with low leverage, and more cash than debts. The combination of cash and current debt is a red flag. There is definitely excess cash but considering the ongoing losses I would not call it a big cash pile.

The book value of the current assets is 1.310 billion HKD including 508 million HKD of not so valuable current assets such as inventory, prepayments and the right to return goods. Total liabilities are 399 million HKD. Among the non-current assets there are 2 investment properties, in Hong Kong and Shenzhen, with a book value of 78 million HKD. The valuation of the investment properties seems to be conservative with 4.7 million of rental income in 2018. Therefore my estimate of Liquidation Value = 1310 -0.5*508 -399 +78 = 735 million HKD and Liquidation Value/Market cap = 735/282 = 2.6.

BTW about 36% (101 million HKD) of the cash is in RMB. I expect a currency translation loss from these cash holdings because the chinese yuan went down much recently.

Substantial shareholders: the heirs of the former chairman Mr. Kimen Leung Kai Ching 40.5%, third brother and senior manager David Leung Wai Lap 7.23%, outsider investor David Webb, 10.4%, chairman and CEO Wilson Leung Wai Sing 9.5%.

Last fiscal year the CEO/chairman earned 5 million HKD. He did not get a bonus. A year earlier he earned 6.7 million HKD including a bonus of 1.7 million HKD. At that time his 85-year old father was still chairman earning also 6.7 million HKD. Last year the brother of the CEO earned 2.3 million HKD. The other brother, who is sales/marketing manager, most likely earned 2.7 million HKD, see also page 106 of the annual report.

Related-party transactions: the company paid 720k of interest on a loan from the now deceased former chairman/founder. I find it weird that I cannot find this loan on the balance sheet or in note 25.

So this loan must have been given after the start of the fiscal year and must have been repaid before the end of the fiscal year. This is a red flag.

September 2021: Despite the enormous share price decline the stock does not seem cheap anymore at 0.27 HKD per share. It is not a net-net anymore, EBIT is negative and it is not cheap anymore according to any of my quantitative lists.

2. CytRx Corporation: net-net, nanocap, 5-year low

Ticker, Fin Strength	Share Price Anal targ	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
US:CYTR 3	0.32 USD Outperf	10.8 USD -8.6 USD	- -34	0.6 -	1.68 1.63
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-06-30	-8.1 USD	-7.7 USD	-7.3 USD	-	-

September 2019: CytRx Corporation (OTCQB:CYTR) has licensed out 2 drugs against cancer. The first drug candidate is aldoxorubicin, which is an improved version of the widely used anti-cancer drug doxorubicin and has been out-licensed to NantCell, Inc. The second drug candidate is arimoclomol, out-licensed to Orphazyme A/S (listed in Copenhagen, Denmark). According to the company Orphazyme is testing arimoclomol in four indications including amyotrophic lateral sclerosis or ALS, Niemann-Pick disease Type C or NPC, Gaucher disease and sporadic Inclusion Body Myositis or sIBM.

Furthermore the company developed “four lead compounds, LADR 7, LADR-8, LADR-9 and LADR 10 along with a companion diagnostic (‘ACDx’).” The company tried to get extra financing for further development of these compounds but after 18 months still no luck.

A search on the company name and keyword “fraud” revealed relevant information. According to the company’s Wikipedia page it hired a stock promoter in 2014. This stock promoter wrote many positive articles on the stock, on Seeking Alpha and elsewhere. The company used the resulting pop for issuing 86 million USD in new equity and insiders also sold into the pop. Then Rick Pearson found out, shorted the stock and wrote a hit piece, also in 2014. He also wrote the company’s involvement in the stock promotion was more than paying the stock promoter. Company employees even edited concept versions of paid articles directly.

Subsequently lawyers started several class actions against insiders and the company. At the moment the company is not involved in any lawsuits anymore.

A big problem is the CEO, who allegedly was behind this stock promotion. Although Rick Pearson article suggests the CEO, Steven Kriegsman, was the driving force behind the stock promotion the article does not provide direct evidence or allegations. The CEO is a graduate from Stanford Law School Director’ College. It seems he was clever enough to let his assistant have the concept articles redacted. After Rick Pearson published his hit piece the CEO got elected as chairman as well. Kriegsman is still CEO and chairman. That the CEO and chairman are combined in one person is on itself already a red flag.

According to the cash flow statements in my screener this is a “serial diluter” having raised large amounts of money in 9 of the last 10 years. The company never paid a dividend.

Recently the stock delisted from the Nasdaq and now trades on the OTC. The company still reports with the SEC. Also because the company closed a laboratory in Germany it expects much lower cash burn going forward. My estimate is 2.5 million USD per year.

See the annual report over 2018 and the recent quarterly report (June 30, 2019) and the proxy for the annual meeting in 2019.

All share options are way out of the money. The lowest exercise price is 0.77 USD.

There are no retained earnings, just accumulated losses instead.

The balance sheet is strong with hardly any leverage, 1.9 million USD of liabilities, no debts and a 19.4 million USD of cash. My estimate for the liquidation value is 17.6 million USD. Therefore Liquidation Value/Market cap = 17.6/10.8 = 1.63.

Substantial shareholders: CEO Steven Kriegsman owns 875k shares or about 2.5%, California based NantCell Inc owns 5.9%.

Related-party transactions: none in 2018.

In 2018 the CEO earned slightly more than 1 million USD, which I find excessive considering the ongoing lack of success. The CFO got 500k USD and the Vice-President Drug Development only 300k USD. This was paid almost entirely in cash. I do not understand why the CEO got paid more than 3 times as much as the Vice-President Drug Development. I think there is some self-dealing with the CEO compensation.

My take: The fraud is already pretty long ago: 5 years. But I think management is still really bad. Though they did care in 2014 the recent delisting is another sign management does not care about the stock price anymore. That said, my objective criteria for discussing stocks here do not give me good reasons for skipping this one. And after all this is basically a cash shell that can be acquired by anyone with some option-like value on the intellectual property on these 2 drugs.

BTW, there is also protection against unfriendly acquirers, so another red flag. The company has a staggered board. The term of the CEO expires in 2020. The term of 2 other directors expires in 2021 and the term of yet another director expires in 2022. The latter director, a 78 year old Nobel Laureate from 1998 (red flag in combination with stock promotion) was also with the company when the stock promotion scandal became public.

September 2021: Because of the large share price increase the stock is not cheap anymore at $0.60 per share. It is still a nanocap but with one of the worst ranks.

3. Windeln De: net-net, nanocap

Ticker, Fin Strength	Share Price Anal est	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
ETR:WDLK 2	0.45 EUR Buy (1x)	4.5 EUR -9.2 EUR	- -0.1	0.24 -	4.0 2.8
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-06-30	-22.5 EUR	-13.6 EUR	-13.8 EUR	-	-

September 2019: Windeln De AG is an online retailer of baby and toddler products. The company runs online stores directed to German, Austrian, Chinese, Swiss, Spanish, Portuguese and French customers. More than half of the revenue comes from China and the rest of the revenue comes from Europe, mainly from the 3 German speaking countries. In the first half of 2019 revenue has been decreasing in each geographic segment. Also the total number of pageviews of its webstores decreased much in 2018.

Searches on the company name and keyword “fraud” did not reveal any relevant information.

The company went public in May 2015 for 18 EUR per share. From there the share price went south. The current price is not yet a 5-year low, but still an all-time low.

According to the cash flow statements in my screener the company raised for 100 million EUR of equity in 2015. At the end of 2018 the company’s coffins were empty again. At the beginning of 2018 the company raised 5.2 million EUR, which was a substantial dilution compared to book value. However I think this dilution was still done way above book value. In the first quarter of 2019 the company raised again 10 million EUR using a combination of a right issue and a private placements, both at 1.48 EUR. That dilution was most likely below book value. At the moment the company prepares for a new dilution again.

See the interim report over the first half of 2019 and the annual report over 2018.

There are no retained earnings, just accumulated losses instead.

The balance sheet is strong with low leverage, lots of cash and no significant debts.

The book value of the current assets is 26.9 million EUR including for 10.7 million EUR of not so valuable assets such as inventory. The book value of the liabilities is 9.0 million EUR. Therefore my estimate of liquidation value = 26.9 -0.5*10.7 -9.0 = 12.6 million EUR and Liquidation Value/Market cap = 12.6/4.5 = 2.8.

Substantial shareholders: Fosun Global Equity Management/Pinpoint International Group 21.6%, Blue Sword Holdings/Summit Asset Management Company 23.7%.

The company refers to Fosun and Summit as the 2 “Asian investors”, probably Chinese. They have acquired their stakes in April 2019. Fosun Global Equity Management might be an affiliate of Fosun Holdings and Fosun International. I think they bought their stakes from the German Fintech Group AG, see here. I think these shareholders suggest trust in management and the business.

I do not think board members are currently holdings shares worth substantial sums of money.

Related-party transactions: no significant related-party transactions in 2018.

In total the 3 executive directors earned 1.2 million EUR in 2018.

September 2021: Apparently the ticker changed to WDL. I do not know whether this stock is still cheap because of lack of data. In particular the share price and the market cap are not available in my screener. According to other websites (MSN Money) the market cap is €1.52 million at €1.22 per share. Judging the ongoing losses, dilutions and other available data it does not look cheap anymore.

4. Hong Kong Food Investment Holdings: nanocap, close to 5-year low, below liquidation value

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
HKG:60 5	0.84 HKD 0.71 HKD	218 HKD 79.1 HKD	- 0.52	0.34 0.42	0.83 2.4
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-03-31	179 HKD	-45.1 HKD	-51.0 HKD	-	-

September 2019: Hong Kong Food Investment Holdings trades frozen meat and operates a Japanese BBQ restaurant in Tsim Sha Tsui in Hong Kong. All revenue is derived from Hong Kong. Most operating assets are in the “meat trading” business. Neither the “meat trading” nor the “others” business segments are profitable, but virtually all losses are from meat trading.

Furthermore the company owns 30% of Four Seas Mercantile Holdings, an Hong Kong listed company with stock code 374.

Searches on the company name and keyword “fraud” did not reveal any relevant information. David Webb does not mention anything worrisome either. Furthermore checking insider overlap with other Hong Kong listed companies did not reveal anything worrisome either.

The chairman and co-founder, Stephen Tak Fung Tai (71), is also chairman of Four Seas Mercantile Holdings, which seems to be pretty clean as well. FSMH seems to be fairly valued at the current share price of 3.18 HKD, as a reliable dividend payer with a yield of 3%, EV/EBIT = 15, P/B = 0.88 and EV/Revenue = 0.44. At the current share price the value of the 30% stake in FSMH is 366 million HKD.

The chairman is also a long-time and important member of the Chinese Communist Party. That the roles of CEO and chairman are combined in one person is a red flag, especially because this person is the controlling shareholder.

According to the cash flow statements in my screener the company did not buy back shares during the last 10 reporting years and did not dilute either. The company used to pay a dividend but the last year it did so was the year ending on March 31, 2013.

Multi-year metrics do not suggest great assets allocation or good earnings quality.

See the annual report for the year ending on March 31, 2019. An important key audit matter was the book value of the stake in FSMH.

In my screener (table above) EBIT is very high because of a one-time gain of 203 million HKD from the disposal of a parcel of land. So EBIT would be about -20 million HKD when ignoring this one-off gain. Apart from this profit and a very small profit 10 years ago the company only booked losses during the last 10 reporting years. On average the loss was about 20 million HKD per year before tax and interest, during the last 6 years.

Retained earnings are 520 million HKD excluding 11.2 million HKD of the company’s share in retained earnings of FSMH. Therefore Market cap/Retained Earnings = 218/520 = 0.42.

The balance sheet is very strong with hardly any leverage, lots of cash but also some debts. The combination of this 176 million HKD cash pile and 38 million HKD of current debt is a red flag.

The book value of the current assets is 238 million HKD including for 40 million HKD of not so valuable assets (mainly inventory). The book value of the liabilities is 56 million HKD including 3 million HKD of non-controlling interest. Among the non-current assets there is the stake in FSMH with a market value of 366 million HKD (the book value is 445 million HKD). Therefore my estimate of liquidation value = 238 -0.5*40 -56 +366 = 528 million HKD and Liquidation Value/Market cap = 528/218 = 2.4.

Substantial shareholders: CEO/Chairman Stephen Tak Fung Tai 67.5%,

Related-party transactions: the company gets small amounts of rental income from associates and related parties. Also there are small purchases and sales of goods. But the biggest transactions are 7.4 million HKD of “Purchases of goods from a non-controlling shareholder of subsidiary”.

The chairman earned 3.0 million HKD in 2018. This was more than twice as much as 2 of the other executive directors, earning 1.4 million HKD each. One of these 2 other director was a son of the chairman. None of the directors got a bonus. Surprisingly 2 executive directors hardly got any pay, including the other son of the chairman. One level lower in the hierarchy the company paid 1.3 million HKD in total to 2 employees.

Two sons of the chairman are also executive directors.

September 2021: This stock looked great but business was not great. It is still a nanocap but not a good one. In my screener I see that the score on Financial Strength is not great, the company is loss making and has negative cash flow from operations. Therefore, it is not cheap anymore at 0.69 HKD per share.

5. Takada Corp: low EV/EBIT, more expensive than in ranking

Ticker, Fin Strength	Share Price Anal targ	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:1966 8	577 JPY -	4166 JPY 7498 JPY	3.77 0.15	0.39 0.49	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-03-31	2389 JPY	1630 JPY	1191 JPY	3.8	1.7

September 2019: Takada Corp designs, manufactures, installs and maintains equipment, pipes, and electricity in factories. The company owns 5 factories in Japan, one in Singapore and another one in Malaysia. It plans to invest 500 million JPY in a new dormitory near one of their factories.

About 90% of the sales is in Japan and the rest is in the rest of Asia. Roughly the same ratios apply for tangible fixed assets. Shareholder Nippon Steel & Sumitomo Metal Corporation is good for about 20% of sales.

In Edinet the company can be best found using code E00209. Google translate transcribes the Japanese name as Takada Industrial Co.

A search on the company name and keyword “fraud” did not reveal any relevant information.

Multi-year metrics do not suggest good earnings quality or great asset allocation. The company spends about 100 million JPY per year on research and development. On the company’s name are several patents. I found 2 patents expiring in more than 10 years.

In total there are 10.22 million shares including 3.00 million non-voting preferred shares and 0.89 million treasury shares. This includes a buyback of preferred shares in July 2019. There are 3 different classes of preferred shares. Unfortunately the Japanese description is not so clear. I think one preferred share is equivalent to up to 1000 JPY, but depending on the price of the commons probably less. In a transaction in July 2019 the average buyback price was 860.8 per preferred share. So the value of the prefs is about 2.58 billion JPY and in any case at most 3.85 billion JPY. At a share price of 577 JPY the market cap is (10.22 -3.00 -0.89)*0.577 = 3.652 billion JPY. When counting the preferred shares as debt the enterprise value is about 9.00 billion JPY, also taking into account 400 million JPY of non-current investment securities.

My screener underestimates the enterprise value but also underestimates EBIT and probably also free cash flow because of good results in the quarter ending on June 30, 2019. Taking the larger enterprise value into account my estimate of EV/EBIT is 3.77, still higher than the 3.5 in my screener. To compute the EV/EBIT number I used the data in the Kaijinet website. In the table above P/B and P/FCF are still taken from data in my screener (based on the Reuters/Thomson database).

According to the cash flow statements in my screener the company is a good dividend payer. During the last 10 reporting years the company did not dilute. Instead the company spent large sums on buybacks during 4 out of the last 10 years, including last year and the year before. As a result the company scores very well at my metric “Weighted total yield”. However I think last year’s repurchases were purchases of preferred shares from Fukuoka Bank, so really debt reduction instead of real repurchases.

I had a look at the annual report (March 31, 2019) and the subsequent quarter.

Retained earnings are 7.45 billion JPY. Therefore Market cap/Retained Earnings = 3.65/7.45 = 0.49.

The balance sheet is somewhat leveraged with Tangible Assets/Tangible Equity = 3.2. The current ratio is well above 1 but there are for 5.3 billion JPY of short-term loans against 2.1 billion JPY of cash. There are no non-current debts. The company will have to refinance or extend the current debt since it would take at least 3-4 years to repay debt from cash flow.

Because of the preferred debt my estimate for the liquidation value is less than 1 billion JPY so the company trades above liquidation value.

Substantial shareholders: Fukuoka Bank 35.5% (5.0% voting, also owns prefs), West Nippon Kosan Co 8.4% (12.4% voting), Nippon Steel & Sumitomo Metal Corporation 4.3% (6.4% voting), Takada Works Employee Stock Ownership Association 3.8% (5.7% voting). Several banks own small stakes. Two Japanese outsiders own 1.7% and 1.3%. The CEO/President owns 59k shares. At the current share price his shareholdings are worth 318k USD.

I think there are no big barriers for an unfriendly acquirer. The company does own some stocks held as non-current investment securities though. So there might be hidden block ownership. However the company only holds 400 million JPY of non-current investment securities, so it does not really return the favor to other companies.

The 5 directors that are also employees earn in total 36.1 million JPY in salaries. In total 7 directors get 235.1 million JPY for being a director. So if the CEO earns twice as much as the rest he/she might get 60 million JPY per year (about 560k USD).

Related-party transactions: the company purchased uniforms for a total of 33.5 million JPY from a company controlled by a close relative of one of the managers.

September 2021: The reason I did not selected this stock was probably because my analysis revealed it was less cheap than it seemed in my screener and ranked lists. However, this one did very well. Currently the stock is still cheap at 688 JPY per share. For that price it is among the best 14% in my low EV/EBIT list. But again, be careful because this stock is probably still more expensive than my rankings and screener data suggest.

6. Ikuyo Co: low EV/EBIT, nanocap, 5-year low

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:7273 6	1119 JPY 1102 JPY	1772 JPY 397 JPY	0.75 0.02	0.37 0.76	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-03-31	531 JPY	2275 JPY	791 JPY	2.4	4.0

September 2019: Ikuyo Co produces car parts. Examples of interior parts produced are “Door trim, floor console, pillar trim”. Examples of exterior parts produced are “Radiator grill, bumper, side garnish”. In addition the company produces prototypes and “automotive functional parts”.

See also the Japanese Wikipedia page. The company owns 4 factories in Japan and a very small factory in Indonesia. The company does not have any plans for major disposals or investments. Almost 50% of the revenue comes from Mitsubishi Motors Corporation. Another 11% of the revenue came from Mitsubishi Fuso Truck and Bus Corporation.

A search on the company name and keyword “fraud” did not reveal any relevant information.

According to the cash flow statements in my screener the company pays a dividend since 2 years. During the last 10 years the company has not diluted. Instead it spent insignificant sums on repurchases.

Multi-year metrics are pretty good: the company is among the 32% stocks with the highest quality in the low EV/EBIT + quality tab of the spreadsheet. In particular the 8-year metrics are better than average.

The company does not spend much on research and development: last fiscal year it spent 65 million JPY on reducing weight of car parts/interior parts, development of better painting technology and development of electrification-related resin materials.

The recent profit and loss account (from June 30, 2019) is not yet available in my screener. I have therefore corrected the EV/EBIT from 0.51 to 0.75.

The share count is 1,538,500 including 15,000 treasure shares. Therefore the market cap is 1.72 billion JPY, so slightly lower than the 1.77 billion JPY in my screener (table above).

I had a look at the annual report over the year ending on March 31, 2019 and the subsequent quarterly report. Last 2 quarters EBIT was unusually low due to higher costs and lower revenue.

Retained earnings are 2.34 billion JPY. Therefore Market cap/Retained Earnings = 1.77/2.34 = 0.76.

The balance sheet is moderately leveraged with Tangible Assets/Tangible Equity = 12.0/4.6 = 2.6. The current ratio is slightly above 1. The company has a big cash pile combined with low current and some non-current debt. The combination of a big cash pile and current debt is a red flag.

My conservative estimate of liquidation value is very low and the stock trades way above liquidation value.

Substantial shareholders: Nitto Corporation 32.9%, Masai Sakai 13.1%, BNY GCM Client Account JPRD AC ISG 4.3%, Yaizu Body Industry Co 3.7%, Hiroshi Mizuno 2.6%. Percentages are based on the share count net of treasury shares. Several other investors, banks and companies hold smaller stakes. Directors have not invested substantial sums in the stock.

Because of block ownership I do not think an unfriendly acquirer can get a controlling stake.

Payment for 4 directors was 69.2 million JPY including a small bonus. These executives might also have salaries as employees, but no executive earned more than 100 million JPY.

Related-party transactions: a Chinese subsidiary of Nitto Corporation sold for 27.6 million JPY of “injection molded products (plastic) to the company. These 2 companies also share directors. The CEO of Ikuyo indirectly owns 75% of the Chinese subsidiary of Nitto Corporation, and probably also of Nitto itself.

September 2021: Trading volume for this nanocap is not enough to be actionable for my subscribers. Therefore it is not in my ranked nanocaps list. But if I added it manually it would be among the best 13% in this list, at 1313 JPY per share. So this stock is still cheap, despite negative EBIT and a not so high score on Financial Strength.

7. Takuma Co: low EV/EBIT + quality

Ticker, Fin Strength	Share Price Anal targ	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:6013 9	1195 JPY 1760 JPY	99,185 JPY 32,164 JPY	2.8 0.26	1.22 1.53	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-03-31	10,018 JPY	11,256 JPY	10,723 JPY	-	1.8

September 2019: Takuma Co constructs and maintains waste treatment plants, sewage disposal plants, waste power and biomass power generation plants, boilers for consumers and vacuum water heaters for commercial facilities and factories and cleaning systems for the semi-conductor industry. More than 75% of the revenue and more than 90% of the profit comes from the business segment “Domestic Environment & Energy Business”. The consumer heat energy business (boilers for consumers and commercial vacuum heaters) is good for about 10% of the revenue.

The company owns 2 small factories in Japan. The company plans to invest 2.06 billion JPY in a newly built training center in Japan, to be completed in October 2020.

A search on the company name and keywork “fraud” resulted in a couple of hits. In 2006 the company was allegedly involved (link to paywalled article) in a bid rigging scandal. See also this free article from 2006. In 2009 the company refused a settlement, see here (paywalled). Unfortunately I could not find the final outcome for the company.

According to the cash flow statements in my screener the company has been paying dividends since the year ending on March 31, 2013. During the last 10 years the company did not dilute but spent insignificant sums on buybacks.

Multi-year quality metrics for judging earnings quality and asset allocation are very good. The company spends almost 1 billion JPY per year on research and development. I could not find any patents expiring in more than 10 years though.

I had a look into the annual report over the year ending on March 31, 2019 and the subsequent quarterly report.

The number of outstanding shares is 83.0 million, including an insignificant number of treasury shares.

Retained earnings are 64.8 billion JPY including 4.3 billion JPY of other comprehensive income. Therefore Market cap/Retained Earnings = 64.8/99.2 = 1.53.

The balance sheet is very strong, with low leverage, a big cash pile combined with insignificant debts. No financial distress here. Since P/B is above 1 the stock trades above liquidation value.

Substantial shareholders: the stock is held by street names and investors. The largest 10 shareholders hold 42% of the voting rights.The largest stake is 10.15% held by “The Master Trust Bank of Japan (trust account)”. Also foreign investors own small stakes such as Threadneedle Investment Funds ICVC-Japan Fund and affiliates 5.1%, Schroeder Investment Management Co 4.5%, and the government of Norway 2.1%. One individual investor, Takuma Kyoeikai, owns 2.1%. Management has not invested substantial sums in the stock.

I have not found any special obstacles for an unfriendly acquirer. However there may be hidden block ownership since the company holds almost 15 billion JPY of listed stocks.

I could not find information on related-party transactions in the annual report (normally in the notes section). Last reporting year 6 directors earned together 245 million JPY including a fair bonus. The directors might also have salaries as employees. Nobody in the company earned more than 100 million JPY.

September 2021: At 1746 JPY per share the stock is still in my ranked low EV/EBIT list but not with a favorable rank. So the stock is not cheap anymore. The stock is not anymore in my low EV/EBIT + quality list.

8. Hammond Power Solutions: momentum + low EV/EBIT, more expensive than in ranking

Ticker, Fin Strength	Share Price Anal recom	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TSE:HPS.A 5	8.25 CAD -	73.8 CAD 102.6 CAD	6.2 0.3	0.85 1.13	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-06-30	19.5 CAD	10.2 CAD	7.3 CAD	10.1	3.2

September 2019: Hammond Power Solutions manufactures custom electrical engineered magnetics, standard electrical dry-type, cast resin and liquid filled transformers. The company has factories in Canada, the United States, Mexico and India. The company has a 55% stake in the factory in Mexico.

A search on the company name and keyword “fraud” did not reveal any relevant information.

According to the cash flow statements in my screener the company is a reliable dividend payer. In April 2019 the company increased its quarterly dividend from 0.06 to 0.07 CAD. Usually the company does insignificant dilutions every year except for 7, 9 and 10 years ago when it was a net buyer of its own shares.

Multi-year metrics do not suggest great earnings quality of great asset allocation, but they are probably still better than average.

The combination of relatively smooth momentum and low valuation predicts high statistical returns.

See the recent quarterly report (June 30, 2019), the accompanying management discussion, the financial statements over 2018 with management discussion and the circular for the general meeting held in 2019. The results over the first half of 2019 were good with growing revenue, gross margin and growing profit.

There are 11.73 million shares including 2.78 million class B shares with 4 votes and excluding 509k options with average exercise price 8.32 CAD and 69k deferred share units. My screener does not seem to take these extra shares into account when computing the market cap and therefore underestimates the market cap. At a share price of 8.25 CAD the real market cap is 100.7 million CAD (including 4 million for the options and deferred share units) instead of 73.8 million CAD from my screener (spreadsheet and table above). Using this corrected market cap I compute an enterprise value of 121.5 million CAD from the balance sheet. When I use the corrected enterprise value to compute EV/EBIT it turns out that metric is still 6.2, so only slightly higher than the 6.0 from my screener.

Retained earnings are 88.8 million CAD including 8.5 million CAD of accumulated other comprehensive income. Therefore Market cap/Retained Earnings = 100.7/88.8 = 1.13.

The balance sheet has moderate leverage with Tangible Assets/Tangible Equity = 2.16. The current ratio is well above 1 but there is about 35 million CAD of current debt and similar liabilities offset by only 10 million CAD of cash. The debt might become a problem if free cash flow decreases. The company has a credit agreement for at least 40 million USD expiring in 2021 and therefore I do not consider it financially distressed.

Substantial shareholders: the chairman and CEO William G. Hammond controls the vote with 32.8% economic interest, Foyston, Gordon and Payne Inc 13.6%, FIAM LLC and Fidelity Institutional Asset Management Trust Company 7.6%.

The main shareholder is controlling the company through a dual class share structure (red flag) and he is both CEO and chairman (red flag).

In the by-laws there are provisions to protect minority shareholders when the company is acquired. An acquirer has to make a reasonable offer for the listed class A shares, that is above the market price and the price for the class B shares may not exceed the market price of the class A shares with more than 15%. If these conditions are not met the class A shares are automatically converted to class B shares which ends the dual class share structure.

Related-party transactions: in the first half of 2019 the company purchased for 173k CAD from a company sharing the Vice Chairman. In 2018 the company purchased for 322k CAD from the same company. At Hammond Power Solutions this director is an independent director.

In 2018 the chairman/CEO earned 602k CAD and the CFO earned 446 million CAD. Very often there is a much bigger pay difference between the controlling shareholder and the other executives.

My take: seems to be a well managed business with some growth and shareholder friendly management, at a reasonable price.

September 2021: At11.53 CAD per share the stock does not look cheap anymore, with negative EBIT and otherwise unfavorable multiples.

I chose this stock for its smooth momentum. Two years ago I did that by visually inspecting charts and some extra screener constraints. Currently I do that with a computer program. It turns out the latter method returns stocks with much smoother momentum. The chart above is somewhat smooth but not smooth enough for the best chances on good returns.

9. UMT United Mobility Technology: falling knife, nanocap, 5-year low

Ticker, Fin Strength	Share Price Anal recom	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
ETR:UMD 5	0.27 EUR 1.2 EUR (1x)	6.4 EUR 2.9 EUR	- 0.31	0.79 -	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	0.48 EUR	-0.68 EUR	-0.68 EUR	-	-

September 2019: UMT United Mobility Technology AG develops fintech app software mainly for the German public. The company develops mobile payment apps and loyalty program apps and related software. The main business is the mobile payment app/platform. See the company presentation from April 2019.

A search on the company name and keyword “fraud” did not reveal any relevant information.

The stock trades with much higher liquidity than screener data suggests. This has 2 reasons. First because the stock trades on 2 exchanges while my screener only takes trading on the Xetra into account. That doubles the trading volume. Second, I measure liquidity using Average Trading Volume/Public Float. My screener assumes a public float of 100% while in reality the public float is only 37%. So my screener computes this metric too low.

In 2017 the company issued 3.5 million shares bringing the share count to 21.033 million. In March 2019 the company placed 2.5 million extra shares with its founder and major shareholder for 1 EUR per share, way above the market price. The company did not get the cash though. Instead the share issue was used to pay off a loan from the major shareholder. Because of this dilution in a subsequent event the share count is 23,533,569 and at a share price of 0.27 EUR the market cap should be 6.4 million EUR. Unlike what I expected the market cap displayed in my screener is correct. Surprisingly I could not find separate filings or news releases about this event (red flag).

My screener displays interim numbers until June 30, 2018. But the new annual report over 2018 is already out. See here for the English version. I think the English document is better because it explicitly says it contains consolidated financial statements. Be careful: there is also an English document with the annual report for just the holding, without consolidation of financial statements.

There are no retained earnings, only accumulated losses instead.

My screener displays 0.33 for Tangible Price/Tangible Book but that is wrong. I have corrected the value in the table above. My correction includes the effects of the dilution in March 2019. Also I manually computed an Enterprise Value of 5.9 million EUR instead of 2.9 million EUR from my screener. It is not clear how the dilution affects the EV since there are no significant borrowings on the balance sheet of December 31, 2018. Because of the 2.5 million EUR of extra funding EV is probably below 3.0 million EUR.

The dilution in March 2019 does not affect the rank in my lists much since my screener comes up with the correct market cap, EV is probably not much off either and the ranking is mostly based on EV/Revenue and Price/8-years of retained earnings. Because my screener does not take the results over the full year 2018 into account both metrics are probably even better than those displayed in my screener.

Substantial shareholders: SWM Treuhand AG Wirtschaftsprüfungsgesellschaft from Grünwald 59%, Level 86 UG (limited liability) from Wiesbaden 4%, CIO Erik Nagel from Dusseldorf 4%, Light Wave Consulting AG from Zug 4%.

Related-party transactions: according to the annual report “No transactions with related persons or companies have been executed which were not at arm's length terms”. I could not find information on executive pay either.

Not really great transparency here, also because standard balance sheet reporting is also not very transparent. Still the shareholder base signals trust in the company and the recent dilution way above book value is also a good sign.

But there is probably something we do not know because there must be a good reason why the share price went down so much. Unfortunately I have not found it. It might be something with these apps they develop. Investigating app performance/usage and downloads, and more generally a deep dive into specific products, is beyond the scope of this newsletter.

September 2021: Unfortunately I missed this amazing opportunity. Probably I avoided it because of the recent dilutions. Never avoid cheap companies with substantial intellectual property, like this one.

The ticker changed to UMDK. And apparently there was a reverse split. At €7.94 the stock is still among the best 36% in my nanocaps list. That is cheaper than the average stock. However, I do not think that is cheap enough to consider buying some shares.

10. Biogen: US-listed low EV/EBIT + quality, large buybacks, close to 5-year low

Ticker, Fin Strength	Share Price Anal targ	Market cap EV, in billions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
US:BIIB 8	224.6 USD 258 USD (28x)	41.4 USD 44.4 USD	6.4 3.2	11.8 2.6	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2019-06-30	6.8 EUR	7.1 USD	6.3 USD	6.6	-

September 2019: Biogen Inc (BIIB) was previously known as Biogen Idec. The company develops drugs. Among others the company sells several drugs against multiple sclerosis and also against psoriasis and several types of lymphoma. The value of a biotech company of this size and valuation depends much on its pipeline. See the Wikipedia article to start reading on Biogen’s pipeline. See also the pipeline on the company website.

The 5-year low is about 205.42 USD, intraday on June 27, 2016. During most of the last 5 years the stock was trading above 300 USD per share or at least in the high 200s. From the beginning of July 2018 until March 20, 2019 the stock was trading above 300. When the company announced a failed phase 3 trial of a drug against Alzheimer the stock went down about 90 points.

A deep dive into this pipeline is beyond the scope of this newsletter, but fortunately I happen to have read already much about the main source of revenue of Biogen: drugs against multiple sclerosis.

Currently about ¾ of the revenue comes from the multiple sclerosis drugs. In particular from Tecfidera (still growing), Interferon (decreasing) and Tysabri (still stable).

These drugs have got strong competition from other drugs, made by other drug manufacturers. In particular Interferon and Tysabri are vulnerable with 554 million USD and 475 million USD of revenue last quarter. Interferon is not so efficacious and Tysabri has dangerous side-effects.

Tecfidera will be on the market for years to come but may face competition from generics. The first generic form of Tecfidera has already been approved in the US, see here. However in the EU exclusivity lasts until 2024. Moreover the company has already filed a new drug application for diroximel fumarate: a molecule similar to dimethyl fumerate (Tecfidari) but better tolerated in the stomach. So I assume the revenue from Tecfidera or the new form (2.15 billion USD or revenue last quarter) is safe. The new form may even be better competition for several less efficacious drugs, not only Interferon but also Aubagio and Copaxone.

The only non-MS drug with substantial revenue is Spinraza against spinal muscular atrophy with 488 million USD of revenue during last quarter. The revenue from this drug is growing strongly but might also face new competition, see here.

A search on the company name and keyword “fraud” revealed relevant information. In 2015 the company settled a lawsuit for 55.5 million USD. In that lawsuit the company was accused of defrauding the federal and state governments by under-reporting their Medicaid rebate obligations. This happened in the mid-2000s. In 2005 several patients sued the company for not having done enough to prevent certain dangerous drug combinations. Furthermore there is an investor class action against the company for false disclosure about its flagship Tecfidera drug against multiple sclerosis in July 2014. The case was dismissed but investors appealed. I think these accusations have merit but the bar to prove them in court is extremely high. In 2006 a former general counsel of Biogen settled insider trading charges for nearly 3 million USD.

A recent Glassdoor review also mentions a corporate culture with “loose ethics” but acknowledges new leadership is trying to change this.

According to the cash flow statements in my screener the company has not paid any dividends during the last 10 years. Instead the company is spending substantial amounts on buybacks every year. Last 4 quarters the company spent over 10% of the current market cap on buybacks.

Multi-year metrics for judging earnings quality and asset allocation are excellent. Biotech is a great business with good management and some luck. But going forward much depends on when Biogen’s drugs exclusivity period ends and competition from competing drugs arrives.

During the last 5 respectively 10 years the company spent about 10 and 17 billion USD on research and development. Also in the first half of 2019 the company spent about 1 billion USD on research and development. One could add last 5 years R&D spending to the book value. Then this measure Market cap/Book value+research = 41.4/13.5 = 3.1, which is similar to several other high flying quality stocks of technology companies.

Surprisingly the company has increased buyback spending in the second quarter of 2019. This suggest a high quality pipeline. Apart from an already filed Tecfidera replacement the pipeline contains a drug against strokes with an ongoing phase 3 trial and another one in phase 2 and several Alzheimer drug candidates. From what I have read it is unlikely the company will succeed with its 2 Alzheimer drugs that are in phase 3. However the company has several other Alzheimer drugs in phase 1. Furthermore there is a Parkinson drug in phase 2 and 2 promising MS drugs in phase 1. These 2 MS drugs aiming to repair nerve damage, distinguishing them from existing MS drugs.

See the recent quarterly report (June 30, 2019) and the annual report over 2018. See also the circular for the annual meeting in 2019.

Retained earnings are 16.2 billion USD. Therefore Market cap/Retained Earnings = 41.4/16.2 = 2.56.

The balance sheet is much leveraged with Tangible Assets/Tangible Equity over 4. The current ratio is more than 2. There is for 1.7 billion USD of cash and 5.9 billion USD of non-current debt. Considering the strong free cash flow and profitability I do not consider the company as financially distressed.

There are 201.7 million shares plus 1.3 million employee options with very low average exercise prices.

Substantial shareholders: BlackRock 8.2%, The Vanguard Group 7.5%, PRIMECAP Management Company 7.3%. Non-executive Alexander J. Denner owns 535k shares. Most directors, including non-executive directors, own shares worth more than 2 million USD.

Related-party transactions: according to the company in 2018 there were no transactions needing to be disclosed according to SEC rules.

The 5 highest paid executives got base salaries between 634k and 1.3 million USD in 2018. In practice stock awards were roughly 6-9 times base salary in 2018. Each of these people got between 5.7 and 16.2 million USD in total.

My take: good company with some hair, specifically new competing drugs, competition from generics and a failed trial. 8-10 billion USD of revenue from the MS franchise seems to be safe/robust. So in the bear case the company EBIT goes down by 50%. At current share prices even then the company still has a decent EV/EBIT multiple of 12.

September 2021: At $296 per share the stock is not cheap anymore, at least that is my opinion as a quant.

Need recent ideas? For more information on my global quantitative stock research see here.