A Roth IRA is a terrible thing to waste. Having already paid taxes on the money you put in, your money can grow for decades and you'll never have to pay taxes on them again -- no matter how politicians may change the tax code in the future.
For more than two years, I've modeled this behavior by picking one company per month and investing part of my Roth IRA in shares of that company. Since I started, these picks have returned 34% -- which is double the return of the S&P 500 over the same time frame, not including dividends.
This month, I'm going to put my money behind fiber-optic laser maker IPG Photonics (NASDAQ: IPGP ) . There are lots of reasons to love this company at today's prices.
This isn't the first time that I've used my Roth money to buy shares of IPG. In April 2012, I made a purchase, and used the following graph to explain why IPG was such a good buy. Inspired by Clayton Christensen's The Innovator's Dilemma, the visual sets the table for understanding why IPG is such a good buy right now.
While at first a new technology might seem inconvenient and weak, it can quickly ramp up its utility and -- adding to its momentum -- offer a better price point while delivering superior performance than the standard technology in the marketplace.
To understand what I mean, think about how the computer (disruptive) replaced the typewriter (standard). At first, no one had enough money or space to buy a computer that you could type on. But over time, computers have become for more useful -- and cheaper -- than typewriters.
The same is the case for IPG Photonics. For years, carbon-based lasers have been the industry standard. Those lasers made bundles of cash for industry leaders Rofin-Sinar (NASDAQ: RSTI ) , Coherent (NASDAQ: COHR ) , and Newport (NASDAQ: NEWP ) .
But then IPG came along as the first to offer fiber-optic lasers. While at first it was difficult to sell customers on the value-add of the technology, the industry is starting to catch on.
Fiber-optic lasers are not only more powerful than carbon-based lasers, but they run more efficiently and can compete on price. These advantages are so significant that Rofin-Sinar, Coherent, and Newport have all joined in the party with fiber-optic offerings of their own.
Don't be scared by the competition, as IPG has three key advantages in the market. First, as the earliest entrant into fiber-optic lasers, its research and development teams have a huge head start over the competition.
During 2012, 91% of IPG's revenue came from sales of fiber lasers, while at Newport all laser sales (fiber and otherwise) were only 30% of revenue. Meanwhile, neither Rofin-Sinar or Coherent broke out sales by laser type, but unlike IPG, they both offer CO2 and other solid-state lasers.
While that gives Coherent, Newport, and Rofin-Sinar a more diverse product offering, it also means IPG is far more incentivized to focus on fiber-optic lasers, and devote the requisite R&D dollars to stay ahead of the pack.
Just as important, IPG is vertically integrated. Normally, a company will outsource the manufacturing of component parts, like laser diodes. But IPG has invested heavily in the capability to produce all requisite parts in-house, which means it can cut costs for customers and undercut the competition on price.
A growing market
Those advantages are doubly important given the growing market for high-powered lasers. Materials processing -- the cutting and welding of large sheets of metal -- is the most important sector for IPG. During an August presentation, the company made it clear there's lots of room for growth here.
The fact that fiber lasers still only have minuscule penetration in the high-powered and microprocessing applications -- and the fact that IPG is the leader in fiber lasers -- gives you an idea of how much of an opportunity the company has here.
Furthermore, the company is enticing other industries to try out its lasers. These other industries include aerospace, telecom, electronics, and medical applications. Though JDS Uniphase represents significant competition, it only operates in telecom, a small slice of the global laser pie.
These other sections are expected to supplement growth in materials processing, which is expected to increase by 21% per year over the next three years.
A great price
One thing to understand about lasers is that they can be lumpy. Because IPG relies heavily on Europe for its revenue, the company has been hurt by slower-than-expected sales for years. Such is the reality of existing in a cyclical industry.
I can't tell you when Europe's economy will start to show signs of life again, or when global demand for fiber-optic lasers will pick up again. I can tell you, however, that if it were to happen today, IPG would be the best positioned to benefit. With a stock that's trading for 19 times earnings, given these prospects, I think it's worth owning shares of IPG.
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