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If you can find out the real conditions, then you will know who will prevail.
-- Sun Tsu, The Art of War

IPG Photonics Corporation (IPGP) must really be doing something right. The price of the stock has more than doubled since the start of November. Last week, IPGP filed an 8-K and press release stating that it expects to have $.53-$.56 per share in earnings. This compares to the expected result of $.30-.35 per share for the quarter ending December 31, 2010. China and Europe were listed as the primary driver of the growth. This was the first warning sign for me after looking at the chart. Any company that depends on China for future growth is in constant peril in my opinion. If it isn’t the unlevel playing field, it’s the theft and “copy-cat” of technology squeezing margins and lowering sales. If something is a hot technology, you can count on the Chinese to be working overtime to make it their own.


(Click charts to enlarge)

I started watching IPGP on Thursday when the price action triggered two of my proprietary signals (I name my signals after friends and family). First, I received a Laurel gap up signal (that did not confirm, so I did not take it) and then at the end of the day, a William short signal (I did not take the William signal either as I shorted another stock that looked more promising). Because of last week, I was keeping an eye on it and started reading further into the company. Those that follow my trading know that one of the first things I look for is what the insiders are doing. If a stock is moving higher and the insiders are buying, it is a major green light to get on board. If a company is buying stock to lower the amount of the float, I do not consider that a positive without management on board. A good example of a stock that is due for a pullbakc is NPSP, which I wrote an article about two weeks ago.


I looked at EDGAR Online and I saw that management has sold an eye-popping 12 million shares in the last year. IPGP is a company that has averaged less than seven million shares of trading per month. Over 14% of the trading is by insiders selling shares. All alone, that has the appearance of a penny stock pump and dump with management dumping shares on the market as fast as they can. But wait, it gets better. In the recent run-up, management has sold over 11.1million shares in the past 90 days. That means the selling by insiders is accelerating. Who is the number one person selling stock, including shares within the past few weeks? Dr. Valentin Gapontsev, the CEO of the company, is the number one insider selling shares according to EDGAR Online.

One would think the CEO knows if the company is growing in value and the stock is undervalued. Dr. Gapontsev is surely in the best position to know how the company is doing. However, Dr. Gapontsev appears to have missed out on the biggest part of the increase in price. I would think that is because the increase amount is more than expected and it would be understandably so. The chart appears to show that the price is going straight up. The news is out and the earnings are factored in the price, so it is not like the upcoming earnings release will surprise anyone. I was thinking that if I tried to connect the dots with the insider sales and the price run-up that perhaps a secondary offering would be well-timed in this time frame. With the last quarter showing total cash of about $96 million and net debt of about $79 million, along with the recent price increase, this would be an opportune time to pay down debt with some dilution. This may be especially attractive if management is concerned that the rate of increase of sales/profit may be difficult. As I watched the price fall back down in after hours trading, another company did announce a secondary shortly after I thought the timing may be good. I will admit it made me look at the chart again a little more closely. The trailing twelve month PE is a blistering 84. Looking forward, the PE is still very high with Yahoo Finance via Thompson reporting over 35. Using napkin math of $2 for the next year, that still gives us a PE of 27, and that assumes no hiccups in the next year. Basically, for anyone to buy IPGP, they have to pay a future multiple of over 27 with the thought that someone else behind them will pay an even greater multiple once all the news dies down.

I use a proprietary mix of technical analysis, financial crowd behavior, and fundamentals in my short-term trades. While not exactly the same in longer swing trades to investments, the concepts used are similar. I believe the company and the company stock correlation have separated, thus leaving the stock to be over-priced relative to the performance of the company. I started to short IPGP in late afternoon trading, fading the move higher into the close. The after-hours trading price action was of particular note as the price fell back down, and it appeared that by the end of the day those who chased the stock price higher had their fill. I will expect IPGP to move lower in both the short term as well as a little further out. Charts like IPGP don’t happen often, but when they do, I like to get the most from it.


Disclosure: I am short IPGP.

Source: IPG Photonics: Eye Popping Chart Due for a Pullback?