Deep Value, Foreign Companies, Nano-cap, Long Only
Contributor Since 2012
As a mathematician (Ph.D.) I use 7 quantitative strategies with statistically extremely high returns. I select these cheap companies with software comparing thousands of global stocks on value metrics, liquidity, quality metrics, and momentum. I focus on global nanocaps and net-nets. Check Turning Rough Stones: turningroughstones.substack.com
In the second half of August 2020 I bought Sekonic Corp (TYO:7758) for about 917 JPY. At the time it was a good net-net and nanocap based on statistics. In January 2021 Seeking Alpha asked their Marketplace contributors to write something about their best idea for 2021. I had a look at my stocks and saw Sekonic Corp would probably have the best chances on a high return. With investing we can never be certain, since much simply depends on luck. But this idea looked still great for 975 JPY per share. See my blog post from 15 January 2021 and the summary article also with ideas from other Marketplace contributors.
I use fixed holding periods for several reasons. The main reason is to capture big positive outliers, so to take advantage of momentum. Other reasons are to reduce time spent on trading, to reduce trading costs and to reduce the number of ideas I need to investigate. For value stocks my holding period is one year. After a year I revisit the stock. If it is still among the cheapest stocks in my quantitative rankings I hold the stock for another year. Otherwise I sell.
So, after a year, in August 2021, I revisited Sekonic Corporation. Not much had happened. The stock price had gone from 917 JPY in August 2020 to about 1030 JPY. So, a good return but way below my average return. That happens with investing. Usually a good outcome can also be attributed to luck.
According to my quantitative rankings it was still a great net-net. As expected it had become profitable (EV/EBIT > 0), with positive cash flow from operations, low stock price volatility and still within 20% from its 5-year low. Therefore, I decided to keep it for another year. Moreover, I informed my subscribers through a comment behind the stock in an update of my "Selected Stocks" list.
Last Friday the share price was still 1035 JPY. For that price the stock was within the best 2% in my nanocaps list and in the best 50% of my net-net list. Furthermore it was also among the best 4% in my list of microcaps with lowest trading volume.
But last Friday finally something happened: A large shareholder made a tender offer for 3400 JPY per share. See this company announcement. Because the announcement is in Japanese my analysis depends on the accuracy and readability of a software translation.
The group of companies affiliated with the acquirer already owns more than 40%. The offer price is approximately at book value and EV/EBIT = 7 or 8. I think the price is fair and therefore chances the tender offer will fail should be small. Investors can submit their shares until 27 December 2021.
My congratulations to everyone who has used this idea!
My broker displays a share price of 3235 JPY. I am not sure whether this price is correct. At 3235 this is a good merger arbitrage idea with 5.1% return in 6 weeks, so for an annualized return of more than 50%. I expect the discount will close in a couple of days. With Japanese stocks the spread is usually extremely low, because very few deals fail and interest rates are low.
I think it is almost certain this particular deal will also complete. Outsider shareholders will not want to wait years for another opportunity with this value stock. Because the price seems to be reasonable chances on a better deal should be low anyway. So, I expect outsider shareholders to take the money and move on.
For the acquirer the deal should be good as well. The acquirer gets the company for a reasonable price. Since for such small companies listing costs are a burden the acquirer will save a lot of costs after delisting the stock. Therefore I do not think the acquirer will cancel the offer.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
Additional disclosure: Long shares of Sekonic Corp. I plan to submit them to the tender offer.