GeoInvesting is always on the hunt for information arbitrage – the opportunity to digest public information and act on it before the market takes it into consideration.  We’ve learned that information arbitrage can lead to over-sized returns and have been focusing many of our in-house tools to uncover this information.  In fact, the rate at which we have undertaken the part of our business plan has increased dramatically over the past year, as evidenced by some of our high profile returns attained in a handful of stocks.

Days ago, our last information arbitrage opportunity yielded over 50% gains in Lakeland Industries Inc. (NASDAQ:LAKE) in just days.

Prior to that, our previous information arbitrage opportunity was in shares of Energy Focus Inc. (NASDAQ:EFOI) and was based on comments made in the company’s conference call that were not widely disseminated. EFOI shares more than quadrupled from the $6 range to as high as $27, before pulling back to current levels today near $12 after we alerted premium members of the company’s bullish statements.

Have We Found the Next Opportunity in Napco Security Technologies

Early on Friday morning, we alerted members to our latest potential arbitrage opportunity we’re looking at in NAPCO Security Technologies In (NMS:NSSC).

We’re not establishing a position in NSSC at the current time, but it’s a company that we have in our due diligence pipeline and are evaluating. We intend to speak with management and will provide more information as we continue to conduct our due diligence.

Napco Security Technologies offers access control systems, door security products, intrusion and fire alarm systems, and video surveillance products for use in commercial, residential, institutional, industrial, and governmental applications.

Our primary reasons for tracking the company lie in the information presented in its latest conference call and improved margins.

  • We believe there was a recent information arbitrage opportunity presented on the company’s Q4 2015 conference call. The company stated it believes they can do $100 million in revenue and $1.00 in EPS for fiscal 2017.  Analyst estimates currently call for $88 million and $0.53 in EPS for 2017 and there have no updates since the conference call — we believe this could be an information arbitrage opportunity, where we have access to this information before the general public.

  • The company has had continued significant gross margin improvement related to operating leverage

The CEO stated on the conference call:

“One metric that’s particularly noteworthy is our gross margin, which for the fiscal fourth quarter increased 220 basis points to 40.7%, and I think it really demonstrates the hockey stick-like leverage in our business model.”

  • The company plans to continue to buy back stock, as well explore other shareholder friendly initiatives. We think this could come in the form of dividends or a special dividend, in addition to buying back stock. The company, to this point, does not have a history of issuing dividends.

“As part of our normal course of operation, the management team and Board of NAPCO routinely evaluate the company’s capital allocation strategy. At the current share price, we still believe that buying back stock is a prudent use of cash, but we are also exploring other value accretive ways of deploying our cash.”

  • The company is transitioning to a recurring revenue model -their recurring revenue continues to grow at strong growth rate (53% for year), and they hope to be at 10% of total revenue by 2017.

As with any responsible research, it is prudent to identify caveats that could temper the company’s outlook.

  • The company faces seasonality issues with its prime selling season in the spring and early summer.  However, the company believes that the growing impact from recurring revenue services will help reduce seasonality and smooth out top line numbers from quarter-to-quarter.

  • The company is just entering fiscal 2016, and investors may be forced to adopt a longer term perspective, as FY 2017 is more than 12 months away.