A Japanese Cigar-Butt for 0.7x TBV
Also trading at just 6.7x FCF with an exceptionally durable business.
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If you’ve been following me for a while, you’ll know I like to mix things up.
At any given time, my portfolio is composed of set ups that are cheap to FCF but also cheap to assets.
I like having solid downside protection.
It’s good for sleep.
Some of my favourite set-ups are Japanese companies that trade ridiculously cheaply to their hard assets.
These are the classic ‘cigar-butts’.
Most of them have weird ownership structures that essentially lock the business up from activists or external forces.
People will argue that these are classic ‘value traps’ because the cash will never be released.
This is partially true, but also fundamentally wrong, imo.
It’s true the stock itself could be a value trap, but it’s not true that you can’t make money from them.
One of the most interesting aspects of deep-value investing is the group-dynamic that drives overall performance.
It’s not the stock that generates the returns, it’s the group of stocks.
In other words, it’s perfectly fine to hold a bunch of cheap Japanese cigar butts, because some of them will inevitably re-rate.
Meanwhile the rest of them will most likely do nothing, which also means you don’t lose much.
The re-ratings occur for many reasons.
Sometimes the management unexpectedly returns excess cash.
Sometimes the underlying business does something magical or catches a tailwind (AI etc).
And, sometimes, the price is so low and stretched to the downside that the only direction it can go next is up.
I’m not joking.
Anyway, today’s business is a classic cigar butt.
It’s a business I’d snap up in the real world, if I could (at today’s price), and it’s the kind of stock that would do well in a basket of similarly cheap stocks.
You get the hard-assets at a significant discount and the healthy, cash-flowing operating business for free.
If you’re into dirty, cheap Japanese stocks, you might like this one.
Let’s take a look…