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Some Oracle Disciples in Fund World Are Losing Faith

Is selling by funds a bad omen amid the firm's big earnings, rising stock?

Investors were plowing money into software database titan

Oracle

(ORCL) - Get Report

Thursday, but some of the "smart money" is heading in the other direction.

An upgrade from

Morgan Stanley Dean Witter

analyst Chuck Phillips boosted already frothy investor expectations, sending the stock up 3.6% prior to the company's first-quarter earnings report. The company posted earnings after the close that beat estimates by 4 cents, and announced a 2-for-1 stock split. But many growth and tech fund managers -- the pros we expect to be ahead of the curve -- actually dumped the stock in the second quarter.

Plenty of others are still hanging on and the bellwether is still a big player in plenty of funds. But the situation provokes a weighty question: How much higher will the stock go, now that it's up more than 283% over the last 12 months and selling at a 119 price-to-earnings multiple, compared with 26.9 for the

S&P 500

?

"I think the valuation just doesn't make sense," says Joseph Beaulieu, a senior software and enterprise stock analyst at

Morningstar

. He doesn't think the large-cap company, with a $230.3 billion market capitalization, can keep growing fast enough to merit a soaring small-cap stock's valuation. He wonders if the unexpected departure of President and Chief Operating Officer Ray Lane might hurt the firm down the road since he was seen as a good foil to maverick chief executive Larry Ellison.

"My impression is that Lane really couldn't work with Ellison anymore. Ellison wants to run the whole show and some fund managers might not be too comfortable with that," Beaulieu says.

Clearly some fund managers aren't -- even one manager who owns Oracle shares in his fund referred to Ellison as "kind of a wild man." At the end of the first quarter, 222 large-cap growth funds owned Oracle shares and at the end of July that number tumbled to 165, according to Morningstar data. Over the same 120 days, the number of tech funds owning Oracle shares rose to 49 from 44, even as the number of tech funds rose by a third.

That's a significant about-face for fund managers who piled into a stock that they saw as a solid software play while

Microsoft's

dust-up with the

Department of Justice

weighed on Microsoft's shares. Also, the firm's burgeoning presence in the B2B software/e-commerce business made it a less risky way to invest in that hot sleeve of the tech market than investing in more speculative competitors like

Ariba

(ARBA)

or

Commerce One

(CMRC)

.

The Redwood City, Calif.-based firm essentially offers companies a one-stop shopping software package, including databases that help them track everything from supplies to employees. With many firm's rushing to establish ways to communicate and do business with vendors and customers electronically, many believe Oracle is uniquely positioned to offer its clients the e-commerce software they need.

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"We like Oracle and one thing Ellison has done really well is that he saw the Web coming. You couldn't say that about many big, large-cap software companies," says Paul Meeks, manager of

(MAGTX)

Merill Lynch Global Technology fund and co-manager of

(MANTX)

Merrill Lynch Internet Strategies fund, which both have more than 2% of their assets in Oracle. "I do think they'll have a good quarterly announcement tonight and I think the potential for Oracle is better than it's ever been," he adds.

And those managers who still own Oracle appear to agree. While the number of funds holding Oracle shares dropped in the second quarter, those large-cap growth and tech funds that held on still had more than 1.7% of their assets invested in the stock, on average. And John Ballen, manager of the $21.7 billion

(MFEGX) - Get Report

MFS Emerging Growth fund since its 1986 inception, had a whopping 22.6% of his fund's assets riding on the company at the end of June.

MFS

officials didn't return a call for comment, but in a promotional fact sheet on the fund Ballen says he sees Oracle and

Cisco

(CSCO) - Get Report

, the mammoth and pricey networking concern where more than 13% of his fund is invested, "as the software and communications leaders of the Internet, and the Internet as the biggest emerging growth area in the economy."

Kevin Landis, the tech specialist whose

(TVFQX)

Firsthand Technology Value fund is the top-performing fund over the last five years, has also been buying. Through the first six months of the year he bought more than 500,000 shares for his

(TEFQX) - Get Report

Firsthand e-Commerce and

(TLFQX)

Firsthand Technology Leaders funds. At the end of June Oracle was a 3% and 5.6% position in each fund, respectively.

As usual, there's no consensus, since the stock represents a significant leap of faith at its current price, some 8% below its 52-week high.

"The stock has had a phenomenal run and it isn't cheap, but business is very good. As companies move from just needing databases to e-commerce, the opportunity is great," said Alan Loewenstein, co-manager of the

(NTTFX)

John Hancock Technology fund, in which Oracle is a more-than 2% position and among the fund's top-10 holdings.

Still, the selling by some can't be ignored. Interestingly, MFS was among the firms that sold the most Oracle shares during the second quarter. While Ballan might be a believer, apparently many of his colleagues are not.

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Corrections and Clarifications.