Telecom Stocks Traipse Past Wall Street's Worries

Obviously, it's hard to know who is right. The pragmatist camp argues that there's no reason to stray from valuations based on current industry conditions, because there's no sign that phone companies are prepared to increase their spending plans. But by its very nature, bullish speculation anticipates growth that others don't see. Lately, the markets have made the bulls look good.

One thing is certain: These aren't necessarily the same overreaching growth-at-all-cost tech shops they used to be. A steady diet of spending cuts and sales declines over the past three years has served up some dramatic cost reductions, facility closings and firings.

Lean times make for lean companies and, as optimists would argue, for companies that can profitably exploit the next wave of spending when it comes.

A boom in debt refinancing has also added to the excitement. Low- and no-interest convertible bonds have become popular among the tech crowd. Lucent, Juniper, Comverse (CMVT) and Alcatel (ALA) have each tapped the convert market with the stated intention of using the new loans to pay down older, more expensive obligations.

While in most cases this can lighten debt-heavy balance sheets and help trim interest payments, some observers worry that, like any rush to "cheap" cash, the practice could easily lead to excess. Perhaps most troubling is the question of whether new debt only helps sustain companies that should otherwise fail. Critics charge that the refinancing keeps strong companies weak by keeping the weak companies from failing.

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And interestingly, the latest run-up hasn't been without its pessimists.

Short-sellers attracted to the glow of some of these overbought stocks have placed bets that the shares will fall. But even the shorts have unwittingly contributed to the bullish cause. It seems every tech rally of late has been boosted in some part by short-covering.

Typically, shorts are investors who have borrowed stock on the hopes of replacing it at a lower price. But when the stock rises, they are faced with having to buy at higher levels to cover their positions and prevent further losses. This effectively adds more buyers -- though not necessarily believers -- to the equation.

But until actual demand for new gear returns and sales pick up, the pragmatists aren't willing to join the party. Indeed, some even relish their roles as naysayers.

"I think we are seeing people who were aggressively negative now swinging too far to the positive," says RBC's Wilson. "To be honest, most people are probably investing by following the flow of funds. That's momentum. ... We feel there needs to be some discipline regarding what you pay."

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