[Investor-Analysis] Top 5 Japanese Stocks Through Piotrinski’s F-Score
New year, new value stocks!
Happy 2022 everyone!
Of course I have not forgotten, because today the “Top 5 Japanese stocks through the Top 5 Value Investing Formulas” saga continues.
It is time to introduce you all to another legendary formula that was specifically developed to syphon out all but the most valuable of value stocks:
The Piotriski F-score
Piotroski’s F-score is named after Stanford accounting professor Joseph Piotroski and is number between 0 and 9 (nine being the best) which is used to assess strength of company's financial position.
The score is calculated based on 9 criteria divided into 3 groups:
Profitability
Return on Assets (1 point if it is positive in the current year, 0 otherwise);
Shows you how well a company's investments generate value.
Operating Cash Flow (1 point if it is positive in the current year, 0 otherwise);
A measure of the amount of cash generated by a company's normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.
Change in Return of Assets (ROA) (1 point if ROA is higher in the current year compared to the previous one, 0 otherwise);
Accruals (1 point if Operating Cash Flow/Total Assets is higher than ROA in the current year, 0 otherwise);
Revenues earned or expenses incurred which impact a company's net income on the income statement, although cash related to the transaction has not yet changed hands.
Leverage, Liquidity and Source of Funds
Change in Leverage (long-term) ratio (1 point if the ratio is lower this year compared to the previous one, 0 otherwise);
Change in Current ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise);
The ability of your business to generate cash to meet its short-term obligations
Change in the number of shares (1 point if no new shares were issued during the last year);
Operating Efficiency
Change in Gross Margin (1 point if it is higher in the current year compared to the previous one, 0 otherwise);
Change in Asset Turnover ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise);
Measures the efficiency of a company's assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.
A company gets 1 point for each met criteria. Summing up of all achieved points gives Piotroski’s F-score (a number between 0 and 9).
Adding My Secret Sauce
As always, to remove any outliers from the rankings, I have vetted the stocks with my tried and true Value Vetting Strategy:
A P/E less higher than 6 but lower than 25
An average Earnings Growth higher than 7% over the past 7 years
Return on Equity at at least 10%
A dividend yield higher than 0.5%
Net debt / Earnings Before interest, Taxes and Depreciation lower than 2
Top 5 Japanese Companies on the F-Score
As there were 12 companies that passed the full score on the F-Score and my Secret Sauce requirements, I sorted out the top 5 companies by their Return on Assets (ROA) growth over the past 7 years.
That means that the highest rated companies are the most efficient and productive at managing its balance sheet to generate profit.
For a review of the full dataset used for this formula, click here:
1. Daiwabo Holdings
Overview
Daiwabo Holdings Co., Ltd. is mainly engaged in manufacture, processing and sale of textile products, sale of information equipment, manufacture and sale of machine tools.
Just to emphasize, the five companies on this list all have incredible profitability, a liquidity strong enough to survive a recession, and an operational efficiency well above the average company.
However, Daiwabo holdings holds the number one spot because the Return of its Assets (ROA) is by far the highest.
In 2009, Daiwabo Holdings have merged its textile industry and IT part to become a holding company. Since then, the company has become a serial acquirer of firms and have managed to grow quickly that way. As its ROA is at a high 20%, they have clearly managed to invest their money to acquire well performing firms.
Risks & Opportunities
At first, their operations sound diverse, but looking closer, 92.3% of their sales come from their IT infrastructure business.
Looking at their IT infrastructure, the Japanese PC market share is a key business indicator. In the fiscal year ending March 2021, the company captured 29.7% of the entire domestic market of PCs and 38.2% of the domestic corporate PC market. In other words, Daiwabo Holdings is involved in at least 1/3 PCs distributed to domestic corporations.
Hence, if you believe the future growth of PCs will continue in the Japanese enterprise segment, this is a great investment. If not, stay away, because this company is extremely focused in this segment!
2. Daytona Corp
Overview
Daytona Corporation is mainly engaged in the planning, development, manufacture and sales of motorcycle parts and accessories. The Company operates in three business segments:
The Domestic Wholesale segment is engaged in the planning, development, manufacture and wholesale of motorcycle parts and accessories in Japan and overseas markets.
The Asia Wholesale segment is engaged in the planning, development, manufacture and wholesale of motorcycle parts and accessories, mainly in Southeast Asia areas.
The Retail segment is engaged in purchase of motorcycle after parts and supplies, as well as sales to end user. The other business is engaged in the solar power generation business.
Risks & Opportunities
Betting on Daytona is first and foremost a bet on the strength of the Japanese motorcycle market, and it is looking quite strong:
Domestic demand has been strong across all the year and in fact, in the first half of the year total sales have been 214.661 (+19.5% vs the 2020 and +12.4% vs the 2019) with positive outlook for the rest of the year (source HERE).
A positive trend for motorcycle, and an ROA of 19.9% for Daytona makes it a clear buy if this trend continues!
However, Japan is an aging country and the average age of motorcycle drivers is 53 years. If Daytona cannot switch their share to the rest of Asia, it will like face hurdles in the near future.
Daytona Corporation’s website [EN]
3. ITmedia Inc
Overview
ITmedia Inc. is Japan’s no.1 B2B IT online advertisement company. It is under the massive umbrella of Softbank and mainly engaged in the operation of media businesses.
Risks & Opportunities
Even with a high P/E of 23+, as ITMedia sells digital assets, it is definitely in an industry where such P/E numbers can be tolerated. It is also worth noting that the average historical P/E for the company is 30+, so technically there are some wiggle room for a higher multiple if the company can reclaim some of its former glory.
Also, the Japanese B2B market is still heavily dominated by relationship sales, and the amount companies spend to market to other companies is still minuscule compared to the US or most of Europe. This is a big opportunity for ITmedia, and with a healthy ROA of 16.1% the stock has a clear upside.
However, looking further at recent news of the company, and its downturn of 23% since last year, it is clear that investors see foreign players, like Google and Facebook taking a grand share of ITmedia’s market share.
4. Goldwin Inc.
Overview
Goldwin Inc. is a Japan-based company mainly engaged in the manufacture and sale of sports goods based on fiber products.
The Company is involved in the provision of climbing wears, marine wears, outdoor gears and other outdoor related products, training wears, tennis wears, fitness wears, swim wears, rugby wears, golf wears and other athletic related products, ski wears, snowboard wears and other winter related products, as well as functional underwear, dust proof wears and other products.
Risks & Opportunities
Goldwin Inc is definitely the odd one out on this list. The company does have its own brands, but the majority of its sales comes from being a licensed reseller of more famous brands such as The North Face, Ellesse, Helly Hansen etc.
For being a reseller, the company does have a high ROA of 12.8% which is impressive, and this would likely go up if their own brands become a bigger piece of their sales.
However, this is a tough industry with strong competition, and their licenses could easily be removed if they push they own brands through their retails channels any harder.
5. Sankyo Frontier
Overview
Sankyo Frontier is a long-time favorite, and was in my “8 Most Undervalued Stocks in Japan” post.
The company is engaged in the manufacture, sale and rental of unit houses and multistory parking facilities.
It is also engaged in the shipment, maintenance, delivery, construction and dismantlement of unit houses.
Other businesses include the operation of accommodation, the manufacturing, sale and rental of plant factories, as well as the processing of surplus soil through soil improvement plants.
Risks & Opportunities
Sankyo Frontier’s numbers are very solid: A P/E of 9.2, an ROA of 11.3%, profit margins of 12.3% and an average earnings growth over the past 7 years of 15.3%!
It is hard to see how a company with these margins and this growth can be valued so low.
I can only see two red flags that could hinder Sankyo’s future growth:
The company have invested quite heavily in Myanmar, both as a growth market and for production. As the country is in chaos, it is hard to say how much, if any of these investments Sankyo will recoup.
The company is listed on a smaller part of the Tokyo Stock Exchange, the JASDAQ for emerging companies. This stock exchange has much less exposure to foreign investors which might explain its low valuation compared to foreign peers.
Other than the above two points, there are few reasons why this company will not grow. Even with a flatlined valuation, a dividend yield of above 3% is sure to make Sankyo Frontier a good investment.