The Deep Value Stock of the Week: 6771 (Tokyo)
Ikegami Tsushinki Co., Ltd.
(6771) Tokyo
¥635
Key Points
Nanocap camera manufacturer in Japan
64% P/NCAV and 37% PTB
Trading at 52-week and 5-year lows
Positive net income last year, pays a dividend
Very little info in English
What’s my Strategy?
I am a quantitative deep value investor. I assemble a basket of stocks that are cheap on a certain quantitative factor (e.g. NEV, P/NCAV, PTB, PE, EV/EBIT, EV/Sales). I expect that, over the long term, the portfolio as a whole will outperform an S&P 500 passive strategy.
Some of these stocks will underperform, and some might go to zero. However, there will be the occasional peacock amongst the turkeys, and these outperformers should give me adequate returns. I integrate some very basic qualitative criteria to screen out obvious value traps, but I try to keep my very flawed subjective judgment to an absolute minimum.
The quantitative, basket-style portfolio is old-school Graham, and it forms the basis of several modern value strategies (Greenblatt’s Magic Formula, Carlisle’s Acquirer’s Multiple, O’Shaughnessy’s Value Composite).
Why Japan?
Value investing works best when we work internationally. Shares trade at optimistic valuations in the United States. The speculative mania of the last couple of years has spread from NFTs and crypto into my microcap deep value world. I’ve seen a couple of 100%+ price spikes for stocks that I own which are unsupported by fundamentals.
Japan is a land of value opportunity. I’ve casually observed net-net stocks for years now, and I’ve noticed that they tend to be overrepresented in Japan. This overrepresentation has persisted over the last few years. According to this article, Japanese equities have the lowest average PB of any country’s equities in the G7, and Japanese small caps trade at a PE of 12.7 vs. 24.5 in the US (year-end ‘21). I would guess that value opportunities abound here because 1) Japanese equities have underperformed over the long term and 2) Ben Graham and value investing haven’t taken root here like they have in the United States.
Business Overview
Ikegami manufactures cameras and auxiliary equipment for commercial use. Its primary product line is TV cameras and broadcasting equipment. It also makes security cameras, medical cameras and monitors, and high-speed inspection cameras for use on assembly lines. As a fun bit of trivia via Wikipedia, the company contracted for Nintendo to program parts of the original Donkey Kong arcade game in 1981 (not relevant, but interesting). They’re international, with offices in the US, Singapore, China, and Germany.
I’ll speculate a little here. This could be an appealing industry. Cameras are complex enough to provide an IP moat, but not so complex that they require exorbitant R&D expenditure. I would imagine that the business is somewhat recession resistant since cameras are a fixed expense for the industries that Ikegami serves. For example, broadcasters require a constant number of cameras irrespective of advertising revenue.
But since this is a deep value stock, Ikegami has had lackluster performance. More on that below.
Financial Snapshot
Valuation and Capital Allocation
One of the unfortunate aspects of investing in international stocks is the language barrier. 6771 posts no English-language financial information that I can find (If you see some, please comment). I always like to source financial information directly from company-issued regulatory documents, but that’s not possible here. The whole investment case rests on English-language financial statements that I can find on investing sites like investing.com.
This is an extraordinarily cheap stock. It trades at a P/NCAV of 64%, a PTB ratio of 37%, and a .18 EV/Sales ratio. An anemic 2% net margin is very low for almost any business, but a profitable deep value stock is uncommon. Debt levels are reasonable, and the company pays a dividend, which suggests some competency in the c-suite.
Wikipedia claims that Toshiba holds 20% of the common equity, but that appears to be inaccurate. Nevertheless, cross-shareholding is common in Japan. A third of the total Japanese market cap is owned this way. Ikegami may be caught up in some elaborate web that would make unlocking shareholder value difficult. I just don’t know.
Qualitative Checklist
I set some basic quality criteria while doing my research to help me avoid value traps and maximize returns. This section remains similar from one post to another–my hope is that it helps to explain my process somewhat.
Company has a Small Market Cap: Smaller stocks perform better, on average. I don’t like competing against smart money. No analyst coverage and no media coverage mean more opportunities for undiscovered value gems. On average, small stocks outperform their larger peers. I have a soft ceiling of a $200mm market cap. At current exchange rates, 6771 trades at about $41mm.
Firm is an Appropriate Type: I exclude financials, exploration firms, biotech, and shell companies. Financial firms don’t screen well. They must be considered on a case-by-case basis. Biotech and oil E&P can burn through capital–they often trade at a discount to net cash for a good reason. Shell companies tend to have no revenue but do tend to have plenty of overhead, so I take these out of consideration. On an ad hoc basis, though, I will consider adding a shell company to the portfolio as a special situation play.
Stock Recently Traded above NCAV: 6771 traded above NCAV in 2018. If a stock is a net-net for a decade, it’s usually a loser.
Company Has a History of Profitability: Ikegami posted positive net income for FY’21, which isn’t very common for a net-net.
Company Has not Diluted Shareholders to an Excessive Degree: I’ll tolerate a little shareholder dilution at depressed rates, because sometimes cash-strapped management teams have no option but to sell additional shares to keep the firm afloat. Share count has increased since 2017, but it’s not a dealbreaker.
(Optional) Stock is not Trading at 52-week and/or 5-year Highs: I prefer, but do not require, a stock to be off of recent highs. Today’s laggards are tomorrow’s outperformers, on average. Ikegami trades at both 52-week and 5-year lows. Great.
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Disclosure: An earlier version of this post listed an incorrect P/NCAV ratio. I have no business relationship with any company mentioned. I am not a financial advisor, and this post is not financial advice. This post is for informational purposes only. Readers should conduct their own research. Purchase of any security involves risk of permanent loss of capital.