Michael Burry is maybe best known from the film, The Big Short by Michael Lewis, which tells him betting successfully against mortgage securities before the 2008 crisis. Among investors Burry is known as a versatile value investor who has beaten the market for many years.
Michael Burry is currently betting on Japan and disclosed his holdings in an email interview with Bloomberg News. All these Japanese companies are small- and medium-sized. It is not hard in Japan to find simple extreme undervaluation – low earnings and free cash flow multiple, also very low P/B ratio.
The main reason Burry is investing in Japan is that many companies have significant cash or stock holdings that make up a lot of the stock price. About half of all Japanese companies under 1 billion USD in market cap trade at less than tangible book value, and the median enterprise value to sales ratio for these companies is less than 50%. Burry wants that companies are investing to grow their businesses, buying back stocks, paying dividends, or making accretive acquisitions. He said that there is tremendous opportunity here for re-rating if companies would take governance more seriously.
Knowing the Japanese character and business style it can be easier said than done. Or at least traditionally, it takes much longer time persuade management to make changes in Japan than in western countries. Of course, Prime Minister Shinzo Abe’s “Abenomics” can have a positive effect. Japanese government adopted an unconventional policy which included monetary easing, a flexible fiscal policy and structural reforms. They also put pressure on companies to increase their return on equity and and doing something with the surplus cash.
Shareholder activism is too nearly unknown and very difficult topic in Japan. That’s why Burry has stated his intention is always to improve the share rating by helping management see the benefits of improved capital allocation and not attempt to influence the operations of the business.
Burry has stakes in following Japanese companies: Tazmo, Yotai Refractories, Sansei Technologies, Tosei Corp., Kanamoto, Altech, Nippon Pillar Packing and Murakami. As an investor, you can buy a small stake in each of these companies and potentially make a good return, but all these companies are also very different.
I want to pick two companies for potential purchase. These are Yotai Refractories Co. and Kanamoto Co.
Yotai Refractories Co.
Yotai Refractories Co. manufactures and sells fire bricks, monolithic refractories, and ceramics in Japan. The Company is also engaged in the engineering and construction of various furnaces. It provide a number of different products, targeting different markets, that are fire-resistant.
Market Cap: 13.43 B JPY
Price: 611 JPY
Tangible book value: 1166 JPY
NCAV: 835 JPY
Price/NCAV: 73 %
P/E 3.9, EV/EBIT 1.9, P/B 0.5 and no debt.
Michael Burry’s company Scion Capital has a 5% stake. Yotai has over 4 billion yen in cash and equivalents. According to Burry it holds a third of its market cap in cash and should use this money resever to buy back stocks.
The business of the company is doing well. Yotai has been incrasingly profitable many years. Revenue growth was tenuous between 2011 and 2016, but after that it has been over 10% per year. EPS growth has been even stronger. Also, tangible book value and NACV growth has been steady at 10% level. So, growing, profitable and cash rich company available very cheaply.
Kanamoto Co. is a provider of construction equipment rentals. The company operates three business segments: construction equipment rental, steel products, and computing products.
Market Cap: 102.4 B JPY
Price: 2695 JPY
Tangible book value: 2865 JPY
P/E 8.4, EV/EBIT 5.6, P/B 0.9 and debt to equity 0.30.
ROE 11-13%, ROIC 12-13%.
Michael Burry likes the credit management and maintenance operations of Kanamoto that keep its equipment in splendid condition. He also likes that the company deploys capital through buying equipment and whole companies. Kanamoto Co. also look to acquire both equipment and whole companies opportunistically, and there is a lot of room for consolidation in Japan.
Kanamoto Co. is growing and profitable. Revenue growth has been during the past 5 years 7.80% per year and during the past 10 years 10.20% per year. Also, EPS growth has been nearly 14% during the past five years ans the same applies to dividends. The company’s free cash flow has been particularly strong. Already for a longer time more than double the EPS. In the construction industry demand can be seen to continue. On the other hand, there are also many macro economic uncertainties – not least the trade friction between the U.S. and China.