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

Metric

IPG Photonics

CAPS stars (out of 5) ****
Total ratings 1,027
Percent bulls 96.8%
Percent bears 3.2%
Bullish pitches 89 out of 93
Highest-rated peers Benchmark Electronics, Molex, Methode Electronics

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

Top Owners

2008*

2009*

2010*

Latest*

Columbia Wanger Asset Mgmt. 4,867,800 4,770,800 4,568,500 4,740,500
Fidelity Investments - 1,412,000 1,792,403 1,792,403
Royce & Associates 2,464,899 2,434,799 1,588,899 1,588,899
BlackRock 26,552 1,054,863 1,231,677 1,231,677
Next Century Growth Investors - - 1,148,155 1,148,155
TOP 25 TOTAL 10,385,324 16,207,860 19,733,851 19,905,851

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

Company

Institutional Ownership

Insider Ownership

Coherent (Nasdaq: COHR  ) 94.90% 0.60%
IPG Photonics 48.46% 5.63%
Newport (Nasdaq: NEWP  ) 85.77% 2.29%
Rofin-Sinar Technologies (Nasdaq: RSTI  ) 98.64% 0.90%

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.

The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies like IPG Photonics, or any of its competitors. To get up-to-date IPG Photonics news and analysis, add the company to your watchlist today:

BlackRock is a Motley Fool Inside Value pick. IPG Photonics is a Motley Fool Rule Breakers recommendation. Rofin-Sinar Technologies is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of IPG Photonics and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (0) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1472181, ~/Articles/ArticleHandler.aspx, 11/23/2014 4:04:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement