Pulse: Analysts Take Their Shot at Picking Rising Tech Stars

Storage stocks, a high-value pocket in the tech-bashing of the past few months, felt a lot less safe today, as the creeping fear over weakening IT spending spread to them.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 27.59 -9.18% 273.04 TSC E-Commerce 0.54 -3.39% 15.70 TSC E-Finance 0.62 -2.29% 26.41 Nasdaq 165.4 -6.7% 2305.1

Even as other tech stocks were hemorrhaging in the fall, many of the premier storage stocks remained relatively safe. The thinking was, as increasing amounts of corporate data are being saved electronically, the need would increase for the computers and networking devices sold by such companies as EMC (EMC), Network Appliances (NTAP), Emulex (EMLX) and Brocade (BRCD). And because saving the information was a top priority, the reasoning went, those products would be high on the IT priority list.

Tuesday's Slide

Net Infrastructure Stocks Take It on the Chin

Networkers Plunge Once More as Investors Undress the Windows

Palm, Handspring and RIM Slapped Down Again

For the year, four of those companies far outperformed the Comp, which, as we all are dismally aware, dropped 39.3% during 2000. In the same period, EMC rose 21.7%, Emulex was up 42.7%, Network Appliances rose 54.7% and Brocade went up 107%. Their valuations rose as well, bolstered by expectations of continued rocketing growth.

Expectations may have changed, given the hammering the stocks were getting today. Robertson Stephens downgraded a number of storage and Internet infrastructure stocks today, saying that IT spending would slow even faster than was expected. Analyst Dane Lewis reduced his ratings on EMC and Network Appliance to attractive from buy.

Network Appliance was off $12.69, or 19.96%, to $51.50 in recent trading. EMC was off $11.50, or 17.2%, to $55.06.

Brocade, the leader in making the switches that connect storage servers, was the subject of a Barron's article over the weekend that discussed whether the company's high-flying growth was sustainable.

Brocade was seeing its shares being trimmed today, down $20.25, or 21.99%, to $71.56 in recent trading.

Other Internet infrastructure stocks didn't share the storage makers' (previous) relative immunity from a shrinking dot-com universe and skidding PC sales. Firms like CacheFlow (CFLO) and Inktomi (INKT) faced a challenging fourth quarter. Inktomi, which closed at $114 on Sept. 29, finished at $17.87 three months later. And CacheFlow, which ended Sept. 29 at $143, closed Friday at $17.06.

It's only become more challenging for those companies. They were among those that Robertson Stephens said still would face problems from smaller IT budgets. The brokerage reduced Inktomi to attractive from buy and CacheFlow to buy from strong buy.

In recent trading, Inktomi was down $4.25, or 23.8%, to $13.63; CacheFlow was down $3.31, or 19.4%, to $13.75.

Also, massive networker Cisco (CSCO) was down nearly 12% in recent trading. A note from Briefing.com attributed Cisco's drop today to rumors on the floor that the networking giant would follow smaller rivals Foundry Networks(FDRY) and F5(FFIV) in missing earnings estimates for the quarter. According to the gossip, the likely venue for the confession would be a Jan. 10 Morgan Stanley Dean Witter conference.

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