OM2 Network - Japanese Meat on the Bones
I bought a position in the Japanese microcap OM2 network (7614:TSEJ).
Before you continue reading, please remember that none of this is investment advice or a buy recommendation. I am invested in the stock based on purely quantitative investment approach. My position is small and part of a larger portfolio. Sudden changes in data can lead to sudden change of my opinion on the stock. Also, data can be wrong or outdated, especially in the microcap space. There might be qualitative red flags which I won’t see and which I won’t cover here. So do your own due diligence.
Primarily, the company is a Japanese food distribution business and dealing with the retail trade of meat, prepared food and processed food products OM2 Network Co., Ltd. is primarily engaged in the retail of meat. Furthermore, the company operates a restaurant business (grilled meat & steak).
The stock is basically trading sideways since 2019 after a drop from a stock price of 2000 Yen. Currently (together with other Japanese Value Stocks), the name picked up some momentum. Generally, OM2 Network could be considered an overlooked low-volatility stock. Let’s look at some key metrics according to my database:
IF THE DATA IS CORRECT (!), the stock is basically trading at its net cash value which makes EV multiples a bit wonky depending on reference day of the data (either high or negative). The business is basically (like many other Japanese Net-Nets) a growing cash pile with a functioning business “for free” on top. The big question is if the management and Japanese culture will ever allow for “unlocking” this value by returning value to shareholders. Currently, there is only a 2% dividend. Considering, the nature of the business and the huge cash pile, it doesn’t surprise that the stock trades at low volatility.
If more value would be returned to shareholders (AND IF THE DATA IS CORRECT), this would be a dream stock. Currently, Japan is trending again after a long hibernation. Maybe, this will lead to more interest in names like OM2 Network. In the meantime, I base my buy on the defensive fundamentals and currently positive momentum in an overall “difficult” global market environment with low market breadth and recession fears on the horizon.
The main risk is that the value stays locked and the sideways trading continues, making the position a dead weight in the portfolio. The chance is that the stock has imo quite good downside protection with the optionality of unlocking value (buybacks, dividends, acquisitions, activists, …). This won’t be a multi-bagger though. If the data deteriorates, the momentum fades and/or a broad recovery in global cyclicals emerges, the stock will quickly be identified as laggard and replaced by my system.
I am invested.