This Stock Will Profit From the Coming Chip Rally

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Nanometrics (Nasdaq: NANO). Are institutions bullish or bearish when it comes to this maker of semiconductor equipment?

Foolish facts

Data current as of Feb. 15.

Chipmaking may be a tough business, but it's one that Fools believe offers opportunity in the digital age. Of the 173 stocks categorized in CAPS as makers of semiconductors and semiconductor equipment, 44 have a five-star rating.

But if the industry holds promise for Fools, they don't extend this courtesy to Nanometrics. The company is one of just seven chip-centric stocks to rate just one CAPS star. And yet there may be more the story.

"As we come to the end of the current lithography with 193nm scanners, both thin film devices and specific metrology tools, especially for the EUV [Extreme Ultraviolet Lithography] market will become more and more important, Nanometrics seems quite well placed to take advantage of these market changes, but time will tell," argued Foolish investor HunkaChunk in October.

So far, it's been a good call. The stock is up 49% over the past three months. Investors have good reason to be optimistic. Nanometrics issued good second-quarter guidance on the strength of chipmakers doubling their capital investments, and a longer-term view that suggests a return to the glory days of 2006 and 2007.

Institutional ownership history

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

Big Money investors appear to like the pattern -- and with good reason. Microfabrication is never easy and any technique for making the process simpler or more cost-effective is bound to receive consideration.

EUV, in particular, promises to one day make it possible to manufacture at 13 or so nanometers. For comparison's sake, consider that Intel (Nasdaq: INTC) recently boasted of volume manufacturing of its new Sandy Bridge chip at 32 nanometers.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's. Data current as of Feb. 15.

And on the subject of comparisons, Nanometrics' ownership profile is superior to peers in two key ways. First, institutions own enough but not so much of the stock that other Big Money buyers couldn't come in.

I also like the institutions that have committed to the stock. Take Royce & Associates. Chuck Royce's firm has spent years cultivating market-thumping performance across a number of well-regarded mutual funds. As of December, his firm had upped its stake in Nanometrics by almost 38%, according to Morningstar.

Nanometrics also has the most engaged insiders among peers. Executives, board members, and strategic shareholders combined own more than 17% of the company, Capital IQ reports. Zygo has the second-best profile in this area, yet its insiders own just 5% of the company.

I'm siding with Royce on this one, and this morning I added a long position in Nanometrics to my CAPS portfolio. Do you agree? Disagree? Let me know you would rate Nanometrics using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add KLA-Tencor, Nanometrics, Nova Measuring Instruments or Zygo Corp. to your watchlist.