Confidence in the Rally Is Fading Like a Summer Tan

Three experts, both short and long, prepare for chillier times.
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Labor Day is past, and if this were a campaign year (feels like one anyway, doesn't it?), we'd be into the home stretch before the election. Instead, we're in the final throes of yet another blockbuster year for technology stocks. And the blocks have been busted despite the dreaded millennium bug that approacheth and the selloff of Internet stocks that continues in fits and starts.

Given that the

Nasdaq

composite is up 29.7% for the year, can the run-up possibly last? For that answer, consider the thoughts of some opinionated folks who spend nearly all their time thinking about tech stocks: Kevin Landis of

FirstHand Funds

, Fred Kittler of

Velocity Capital Management

and William Fleckenstein, whose firm has his own name on the door.

These three are oft-quoted in the financial press for a reason: They give good insight. And they're consistent as well. Landis is reliably ebullient about some of the less glamorous companies building the Internet. Kittler, ever cautious, makes long-term -- and long-position -- bets on technology companies. And Fleckenstein, a perma-bear in good standing, likes to short the tech sector on the belief that fundamentals ultimately will do in the starry-eyed momentum players who see only good things for tech.

First up, appropriately, is FirstHand's Landis, a former

Dataquest

chip analyst in San Jose, Calif. His three funds --

(TVFQX)

Technology Value,

(TLFQX)

Technology Leaders and

(TIFQX)

Technology Innovators -- have combined assets of about $735 million and are up an average of 88% so far this year. Like any sensible man whose performance has tripled the market, Landis is somewhat cautious about tech stocks in the near term. The market's two "panic attacks" in April and in August haven't been severe or long-lasting enough to convince him more bad news couldn't be in store. But he's optimistic nonetheless.

"The thing I remind myself is that the really powerful trends are much longer than my attention span," says Landis, who bets only that stocks will rise. Those trends include that "the Internet is huge," that wireless communications are in the beginning of a boom cycle and that e-commerce activity will translate into growth for Internet infrastructure suppliers.

As such, he's holding onto big winners

Applied Micro Circuits

(AMCC)

and

PMC-Sierra

(PMCS)

, whose charts make

Lucent's

(LU)

and

Cisco's

(CSCO) - Get Report

"look horizontal." Both make chips gobbled up by communications equipment makers and both have been in his portfolio for at least a year. Other faves include wireless-oriented chipmaker

Triquint Semiconductor

(TQNT)

, cell-phone manufacturer

Qualcomm

(QCOM) - Get Report

(the largest holding in the group for FirstHand); and

Packeteer

(PKTR)

, a newly public maker of software to help businesses manage their Internet traffic.

Landis has a slightly more conventional pick, one he prefaces by warning, "You're going to laugh when I tell you this."

"

AT&T

(T) - Get Report

is valued like it's still fast asleep," says Landis, noting that its price-to-earnings multiple of 22 times this year's estimated earnings is far less than similar multiples for

Qwest

(QWST)

(263 times) or

Level 3

(LVLT)

, which isn't profitable and therefore has no P/E. "Wall Street is not going to give

AT&T a rich valuation until it starts to show results," which Landis believes it will.

Kittler uses strangely conservative language for a guy whose $190 million fund in Palo Alto, Calif., shows year-to-date appreciation of 112% (also known as better than doubling). Kittler, whose partner Andy Kessler is a

TSC

columnist, is a recovering economist. So he worries about macroeconomic pitfalls like the potential for China's economy to falter. He's also of the mind that the dot.com "tiering" between good companies and bad will play out "in a brutal fashion" for the rest of the year.

So Kittler sees a choppy rest of 1999 that essentially will end with tech stocks about where they are now. The best bets in such times are "companies in new and strong product cycles that will affect short-term earnings and get you through the duration of the year and next year."

Translation: Buy companies coming out with products other companies are buying, not those who promise earnings potential some time in the future. Examples: Conference-phone maker

Polycom

(PLCM)

in San Jose and

hi/fn

(HIFN)

of Los Gatos, Calif., which makes chips for digital-subscriber-line phone service.

No chat with a couple fellows who make only long plays would be balanced without a nod to a sharp-tongued short-seller like Fleckenstein, who balances out his own life by being a director of Internet company

Go2Net

(GNET)

. Fleck is as negative on tech stocks as ever. Among the leading lights he's shorting to varying degrees are

Hewlett-Packard

(HWP)

,

IBM

(IBM) - Get Report

,

Intel

(INTC) - Get Report

and

Micron Technology

(MU) - Get Report

.

Why?

"I think corporate America is done buying hardware and software, and that the Y2K upgrades are over," says Fleckenstein. In other words, he believes business customers essentially have bought all the technology they plan to buy in 1999, meaning the second half for big suppliers will be weak.

Case in point: the recent disappointing

second

-quarter results from distributor

Tech Data

(TECD) - Get Report

and commensurate weakness in shares of competitor

Ingram Micro

(IM)

.

"If there's going to be a problem in corporate America, the front-line distributors will see it first," Fleckenstein argues. And they're already seeing it. "If there's to be a surprise, it'll be a debacle in this hardware stuff in the fall. It could really, really wreck the tech tape, and I think that's exactly what's going on fundamentally.

Of course, Fleckenstein says his Seattle fund is "not doing particularly well" lately and his fund's assets -- about $20 million -- are puny compared with FirstHand's and Velocity's. (He declined to detail his performance figures.)

But note the central theme of the bulls and the bear: Uncertainty ahead, lack of short-term optimism. And no more summer weather.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.