Fidelity's bullish on Google stock, but will it last?

Who's the biggest Google bull in the investment corral?

That would be Fidelity Investments, the Boston mutual fund giant.

Fidelity fund managers loaded up on shares of Google Inc. during the third quarter, ended Sept. 30, boosting the firm's ownership in the Internet search behemoth by 26 percent to 20.17 million shares, according to documents Fidelity filed with the Securities and Exchange Commission.

The buying binge left Fidelity as the largest institutional holder of Google stock, owning about 10 percent of the company's Class A shares. Google is also Fidelity's fifth-largest stock holding, based on market value, at a time when Google's shares have been surging to the point where some market watchers warn it is overvalued.

Google closed Friday at $417.70 a share.

So far, the Google-Fidelity connection has benefited both companies, though both declined to comment on Fidelity's investment in Google.

For Google, the enfant terrible of the technology industry, the Fidelity stake has been a vote of confidence that has lent Google credibility with the financial establishment. Other lions of institutional investment -- from Capital Research & Management, which runs the American Funds, to the Vanguard Group and Trust Company of the West -- have also grabbed big positions in the Silicon Valley company.

''Fidelity has given Google the stamp of approval from one of the savviest investors on the planet," said Jim Lowell, editor of Fidelity Investor, an independent newsletter published in Needham. Lowell noted that many other institutional fund managers tend to look to Fidelity for guidance -- or for cover -- when contemplating risky investments like Google.

''Fund managers are mostly cowards," he said. ''They watch Fidelity jump into the fray, and see if they come out emboldened or bloodied."

So far, the Google investment has paid off in double-digit returns for many Fidelity customers. The two funds at Fidelity with the largest positions in Google, Contrafund and Growth Company, have year-to-date returns of around 16.5 percent and 13 percent, respectively, compared to a 4.4 percent return for the Standard & Poor's 500.

Google's shares have increased nearly fivefold since the company went public at $85 a share in its August 2004 initial public offering. Fidelity was an early investor, after Contrafund portfolio manager Will Danoff paid a visit to Google executives at the Googleplex in Mountain View, Calif., shortly before the IPO.

More recently, Google's shares went on a torrid streak after Fidelity's summer buying spree. During the third quarter, Google's shares averaged around $296 apiece, according to Bloomberg; since then, its valued has increased by more than a third.

Whether the stock can continue its meteoric rise is the subject of hot debate in the investment world, with skeptics arguing that Google's revenue generator -- paid placement ads tied to search results -- is vulnerable to rivals and its $123.5 billion market value is unjustified.

''It shouldn't be trading where it's trading," said Rick Summer, equity analyst for Morningstar Inc. in Chicago, who has estimated Google's ''fair value" is $254 a share. ''I don't think Google is a company that should be approaching the market value of IBM, and that's what it's doing. They haven't had a chance to stumble, but they will stumble."

If that happens, Fidelity and its customers could be left holding the bag. Or, alternatively, if Fidelity fund managers sour on Google, it could make other investors nervous.

''In the blink of an eye, when Fidelity decides they want to collectively bail out, it will be quick," suggested John Bonnanzio, group editor of Fidelity Insight, another independent newsletter, based in Wellesley. ''The party will be over."

Some suspect that Fidelity already may be lightening its position in Google. When the investment firm files its next report with the SEC in mid-December, Fidelity watchers think it may show several of its fund managers have sold shares of Google.

One reason may be its rich price-to-earnings ratio of 91.40, reminiscent of dot-com era valuations before the Internet bubble burst.

But another may be because mutual fund managers typically take profits in their high-flying stocks at the end of the year to take advantage of losses incurred in other stocks for tax purposes.

In addition to Contrafund and Growth Company, Fidelity's Magellan fund was a big owner of Google, and at least 10 other funds at the company owned smaller Google stakes, according to the most recently available filings.

Lowell, a longtime Fidelity watcher, said the firm is a leader in technology within the financial industry and has long been attracted to strong high-tech companies. At the same time, Lowell said, ''it's highly unusual to have a stock that's a little over a year past its IPO to play such a dominant role in Fidelity's overall holdings."

He noted that Contrafund's Danoff, a contrarian, and Fidelity Growth Company portfolio manager Steve Wymer, who invests in companies with high-growth potential, seldom pick the same stocks for their funds. Of their top 10 investments now, Google is the only one they have in common, Lowell said.

''These guys both really kick the tires and check under the hood, but they don't own anything similar except for Google," Lowell said.

Whether the Fidelity consensus on Google can be sustained is far from certain.

''You've got to have a lot of optimism holding onto this, especially knowing, as Fidelity does, what happened the last time stocks were trading at that price/earnings ratio," Bonnanzio said.

Robert Weisman can be reached at weisman@globe.com.