This Tech Multibagger Isn't Done Rallying

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: IPG Photonics (Nasdaq: IPGP). Are institutions bullish or bearish when it comes to this leading developer of fiber laser technology?

Foolish facts

Data current as of April 7.

There are great calls, and then there are really great calls. Give my Foolish colleague Eric Jhonsa credit for the latter. He nailed it when he made IPG Photonics his pick for the best tech stock of 2011.

"At roughly 23 times its estimated 2011 earnings, IPG's shares might not look like much of a bargain. But forward estimates have been moving up quickly as the company has delivered one blowout quarter after another, and I don't think they're done climbing," he wrote in December.

Two months later, the stock rallied more than 30% after IPG pre-announced blowout fourth-quarter earnings. CEO Tim Mammen told investors the fiber laser market his company had come to dominate was now growing at double the rate of the rest of the industrial laser market. In short: It was everything Eric called for plus a whole lot more. Shares of IPG Photonics are already up 75% year to date, reminiscent of our best picks from the year prior.

But for all that IPG has done so far, the sheen has begun to wear off for some Fools. These bears say the stock has run too far, too fast, and at nearly 50 times earnings is priced for a pullback. I'm not so sure.

Why? Capital spending is on the rise -- in the U.S., especially. A recent report from Bank of America/Merrill Lynch says corporate investment will rise 11% this year after a 15% gain in 2010, Bloomberg BusinessWeek reports. More capital spending means bigger budgets for purchasing technology for lowering manufacturing costs. Fiber lasers have a reputation for achieving that and more.

Institutional ownership history

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

Big Money investors see the allure. The top 25 institutions to own shares have, as a group, added to their positions in every quarter dating back to the third quarter of 2009. Dimensional Fund Advisors has been among the biggest buyers, having purchased close to a half-million shares during that period.

Among mutual fund investors, Will Danoff's highly rated Fidelity Contrafund (FCNTX) boosted its position in IPG by nearly 6% in the reporting period ended Feb. 28. Steve Leuthold's equally impressive Leuthold Core Investment (LCORX) opened a new position in the fourth quarter, right around the time Eric was arguing the case for the stock.

Interestingly, Danoff and Leuthold practice different styles of investing. Contrafund tends to hold large-cap growth stocks while Leuthold's Core pursues a blend of value and growth opportunities. Both philosophies have proven effective.

Competitor and peer checkup

Source: Capital IQ. Data current as of April 7.

IPG Photonics has by far the best ownership profile among its peers. Not only do institutions own less than half the business -- leaving lots of room for additional buyers to get in and push the stock higher -- but insiders still own a good chunk of IPG's shares outstanding. Founder Valentin Gapontsev owns 4% of the company and remains CEO.

At Motley Fool Rule Breakers, we've understood IPG's allure for a while now. It was four years ago this month that my rebellious teammate Karl Thiel first recommended our members buy shares. David Gardner reupped the pick 11 months later. Today, the stock is a two-time multibagger for our scorecard.

Count me among those who expect even bigger gains in the years ahead. IPG is a market leader that sells technology with clear, measurable benefits. Great businesses like that never trade on the cheap, which is why I'm not waiting for a pullback. Earlier today I rated the stock to outperform in my Motley Fool CAPS portfolio.

Do you agree? Disagree? Let me know how you would rate IPG Photonics 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.

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