Playing the Pullback with Highpower International, Inc. (HPJ)

As we’ve witnessed over the past several weeks, when equity markets begin to reel to the downside, the hype surrounding the sector moves and individual stocks in those sectors tend to give way to reality. Selling in momentum names and high-risk issues generally becomes more pronounced, leaving shareholders scratching their heads as to why a stock they bought at $7.50 per share has rapidly traded down to $4.

That set of events seems to apply to the share price movement of Highpower International, Inc. (HPJ), a company I brought to your attention in October, 2013. At the time of that first mention, HPJ shares were pushing to new 52-week highs above the $1.50 level and appeared primed to breakout to the upside based on both business fundamentals and the stock’s technical chart picture. In fact, that’s precisely what they did, ultimately ripping to a new 52-week top above $7.70 reached earlier this month.

To refresh your memory, HPJ is engaged in the production and sales of rechargeable nickel-metal hydride (Ni-MH) batteries, lithium batteries and battery systems. The company also recycles scrap battery materials through outsourcing and resells the recycled materials to some of its customers. The company’s batteries fall into two main categories — consumer and industrial. The consumer batteries category produces Ni-MH and lithium batteries, while the industrial batteries are designed for electric bikes, power tools and electric toys.

At the time of my original write-up, I was attracted to HPJ’s steadily growing revenue stream, which had surpassed $100 million per annum, with the company slowly punching through to profitability. With a July 2013 industry report projecting the global lithium battery market to swell to the $25 billion mark by 2017, Highpower management announced that it was focusing its efforts on its cleaner, higher capacity lithium batteries, and had just completed expanding its production capacity.  The company also projected its own sales to grow between 12% – 15% in 2014, with the company in the black for the period.

From autumn 2013 until early April, HPJ shares vaulted into previously untested waters, first settling in at the $2.50 – $3.00 channel, then using $3 as a springboard to hit parabolic new highs.  A great many factors have transpired to push HPJ higher — as well as lower — over the past several months. In addition to the release of an extremely solid Q4 earnings report in March, the entire lithium-battery sector, and several select alternative energy stocks, had also made parabolic moves in late 2013 and early 2014, leading momentum traders to pile into the sector.

As you can see from the HPJ stock chart, it’s been a wild ride indeed, and certainly not for the faint of heart. Part of the volatility is attributable to the company’s small public float of under 8 million shares, with recent unpredictable market swings contributing to the seesaw trading pattern. In addition, the stocks of so many “go-go” sectors that had made a series of huge upside moves have been especially hard-hit during the recent market pullback, as easy money dreams gave way to the harsh realities of corrective market action.

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This past week has been especially eventful for HPJ shareholders and the company. First, the stock took a huge hit last week after the company announced a public offering of one million shares priced just above $5. As it usually happens with public offerings, selling in HPJ shares ensued, knocking the stock price all the way down to the $4.20 level, which seemed like an overreaction given the relatively small size of the share addition. That was on April 14th.

On April 15th the company released much better news: its subsidiary, Huizhou Highpower, had officially become a supplier to Sony and had begun receiving orders and shipping products. Sony’s initial orders for Highpower’s lithium polymer batteries will be used for its wireless products. As you might imagine, that announcement curried favor with the growing legion of HPJ traders, once again helping to push HPJ shares briefly above the $5 level. More profit-taking ensued Wednesday, however, which has knocked the stock back down to around $4.65.

We all wish we had a crystal ball to predict precise bottoms and tops, but if everyone could do that, it wouldn’t be much of a challenge to make money in the stock market. That said, HPJ appears to have some decent support shaping up at between $4.00 – $4.20 per share. Given how far this issue has already come in little more than six months, however, all bets about support levels would be off if the major market averages end up capitulating to the downside.

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What we do know for sure about HPJ is that it is a growing company in a sector where demand is red-hot and trading liquidity strong. In addition, the company just cut a significant deal with one of the biggest tech giants in the world, and institutional investors were willing to pony up more than $5 million, for shares valued at $5.05 each, just last week. As a result, I believe this company will continue to perform with strength, and ultimately HPJ shares will hit double-digits after the dust has finally settled.

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What we do know for sure about HPJ is that it is a growing company in a sector where demand is red-hot and trading liquidity strong. In addition, the company just cut a significant deal with one of the biggest tech giants in the world, and institutional investors were willing to pony up more than $5 million, for shares valued at $5.05 each, just last week. As a result, I believe this company will continue to perform with strength, and ultimately HPJ shares will hit double-digits after the dust has finally settled.

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As always, trade this and all stocks with care and caution!

Warren Gates
Senior Analyst
Normandy Research

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