Hidden Clues Yield Opportunities in Amcon and Hong Kong Highpower Technology

The GeoTeam® continually scours press releases and SEC filings to uncover clues on companies that will outperform expectations. Two companies that may fit the bill are Amcon Distributing (DIT) and Hong Kong Highpower Technology (HPJ).

The first company, Amcon Distributing, is a leading wholesale distributor of consumer products including beverages, candy, tobacco, groceries, food service, frozen and chilled foods, and health and beauty care products. The Company also operates health and natural product retail stores.

Amcon has posted nine straight quarters of solid quarterly EPS gains, a large reason why we have owned the Company's stock for a some time. Annual EPS has grown from $1.33 in 2006 to $6.56 in 2008. For the 2009 nine month period, EPS has grown 67% to $7.47. Revenue gains have not been as strong, which may be part of the reason why the stock sells at a modest trailing P/E of 6.6.

Can this EPS trend continue? We haven’t had success scheduling an interview with management so we need to search for clues that will guide us.

1. Insider buying - Management has been buying stock rather routinely over the past year, even as the stock attains new 52-week highs. We view this as a strong signal from management about near term growth prospects.
2. Today, the company announced that it will acquire a wholesale distribution firm boasting $60 million in revenues and over 300 customers. We don’t have any details on the growth trend or margins of the firm to be acquired. Using Amcon's current margins, $60 million in revenues would equate to additional $0.74 EPS. Also, keep in mind that the Company can now push its own products through this new customer base.
3. On October 29, 2009, Amcon announced that it increased its quarterly dividend by 80%.
4. Amcon recently paid down $8.6 million in debt.
5. The third and fourth quarters are Amcon's strongest periods.
6. The Company has just seven retail operations, leaving room for expansion.

Of course, these are only clues and we need to be aware of certain risks:

• At $60.00 DIT has performed extraordinarily with a 52-week low of $13.43.
• DIT has a tiny float of about 400 thousand shares.
• Not being able to interview the Company also adds an element of risk.
• Amcon is a $1 billion company which could make top line growth challenging.
• The wholesale distribution business is in a mature, highly competitive industry.
• While Amcon does have some recession resistant product categories such as food and tobacco, its customers are highly susceptible to a weak economy.
• Although Amcon has reduced its long-term debt, it still stands at $5.2 million on the books, with a debt to equity ratio over 20% (higher than we prefer). This combined with razor thin margins will likely place a cap on P/E expansion.

The Second company, Hong Kong Highpower Technology Inc (HPJ), is a manufacturer of rechargeable Nickel Metal Hydride (Ni-MH) and Lithium-ion (Li-ion) batteries.

The GeoTeam® is pondering the Company's ability to meet or exceed analyst 2009 third quarter estimates.

	3rd Quarter 2009 Estimate	3rd Quarter 2008 Reported	Period Change
Revenue	$18.56 million	$20.47million	-9.3%
EPS	$0.09	$0.02	350.0%

Although one of our prime concerns is the estimated decline in revenues, a clue pointing towards opportunity lies in Highpower's September 21, 2009 press release. The Company mentioned that revenues for the first two months of its 2009 third quarter were up 8% to $13.3 million. The GeoTeam® is speculating that HPJ will exceed estimates due to this information.

The stock has recently fallen hard along with most of U.S. listed China stocks. Astute investors may see this as buying opportunity, especially as analysts expect Highpower's 2010 EPS to grow over 40% to $0.40 equating to a PEG ratio of 0.49.

Note: We have not interviewed HPJ management.

Disclosure: Long HPJ, DIT

Comments

[jerrydd:]

Of the people I know ordering lithium batteries from Hi-Power, they have not been good with constant lying , long delays. Be very careful with them.

NiMH batteries are a dying product, it being taken over by cheaper, better Lithium batteries. Why is lithiums are lighter and the material cost are far lower.

Nov 04 06:48 AM

[Robert D.:]

I agree w/ jerrydd, there are much better plays in the battery market industry. The one problem with this industry is that it's still evolving, and a company can be wiped out by competition very quickly by new technology. I would focus on a company's backlog if I am looking into batteries. This will give the investor some sense of security over the next 6-12 month period. I myself, prefer ABAT, which produces li-ion batteries (far superior to NiMH).

As far as DIT, I've also traded this one for a while, and I see this going much higher in 2010 ($125-$150). They are a big "turnaround" story. They are currently listed as a small cap, but this will change, and big money will flow pushing this even higher.

Nov 06 10:03 AM

[WhiteTiger:]

Thanks for the heads up on HPJ. I will keep your thoughts in mind. I am not quite sure I like the ABAT story, although it worked out nice for me. They seem to have a propensity to offer shares as currency.

I think DIT is going to be a monster. They have performed in a bad economy. With the economy improving and the new acquisition, this year could get interesting.

Maj, The Geoteam

Nov 12 09:18 PM