Pelargos Joins Hedge Funds’ Bet on Turnaround at Honda

  • Honda shares may double as air-bag issue fades, Pelargos says
  • Automaker’s price-to-book ratio is near the lowest in 20 years

Pelargos Capital BV, a Dutch hedge fund manager that’s prospered by snapping up battered stocks, is adding to its stake in Honda Motor Co. and is predicting that shares may double, joining other investors placing faith in a recovery for the besieged automaker.

“The market clearly hates Honda,” said Michael Kretschmer, chief investment officer of Pelargos, a manager of $237 million that was spun off from insurer Aegon NV. “If you assume in the long run they will go back to profitability, like they have in the past, you can easily double your money on Honda.”

Pelargos joins money managers such as ClearBridge Investments and American Century Investments that have accumulated more than 63 million shares of Honda since 2015, triple the 22.6 million shares sold in the same period, according to regulatory filings. Honda shares have dropped about 22 percent in the past six months amid recalls of a supplier’s faulty air-bags and are trading at 0.8 times their book value, near the lowest in the last 20 years.

Pelargos, which has almost half its assets in a Japan-focused strategy, tends to outperform during market downturns. The $104 million Pelargos Japan Alpha Fund advanced 3.2 percent in the first four months of this year, compared with a 14 percent decline for the MSCI Japan Index in the period, and beat that benchmark in 2010 and 2011 amid broader market declines. The Japan Alpha Fund returned a cumulative 57 percent since its inception in 2008, with an annualized return of 6 percent.

“Beaten up stocks, those with negative price momentum and strong underperformance, draw our attention,” Kretschmer said.

Honda shares rose to the highest level in almost five weeks, gaining 0.9 percent to 3,151 yen at the close of trading in Tokyo.

Kretschmer has showed a knack for picking stocks of unpopular Japanese companies that bounced back. Take for example consumer-financing company Acom Co. Pelargos started investing in Acom in 2012 when the stock was near record lows as the sector was in midst of a government crackdown on overcharging. Acom’s shares now trade at about 610 yen, from about 130 yen in 2012.

Shares of developer Ichigo Inc. have gained 10 times since Kretschmer began adding the stock when it was close to a record low in 2012. The hedge-fund manager also invested in Takara Leben Co., a condo developer whose shares have more than tripled in the past three-and-a-half years.

Kretschmer said he may buy more Honda shares, boosting the stake to account for as much as 5 percent to 7 percent of the fund’s assets, from about 2 percent.

Japan’s third-largest automaker said this month it’s recalling 21 million more vehicles with Takata Corp. air bags. Kretschmer said he expects Honda’s solid business model and management will help the automaker to get back on its feet when the air-bag issue fades away.

Honda may be nearing the end of recalls for its Takata air bag-equipped vehicles, Nikkie Lu, an analyst at Bloomberg Intelligence, said in her latest report. Margins may improve, given the company likely made the maximum provisions for vehicles affected by the faulty air bags in its fiscal year that ended in March, Lu said. After reporting a 32 percent drop in profit, Honda earlier this month set a profit target 13 percent higher for the current year.

“Our analysis determines whether the stock is temporarily out of favor or a broken business,” Kretschmer said. “Honda is certainly the former, and at 0.75 times of price-to-book, market participants have discounted an extremely adverse outlook already.”

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