Times have gotten tougher than ever for tech companies. Gee, thanks for the update, Dan Rather.

Telecom-tech in particular remains in a terribly precarious situation, as most of the companies in that area have (still!) too much capacity, too much inventory and too many employees. You'll see

Nortel

(NT)

,

Cisco

(CSCO) - Get Report

and

Lucent

(LU)

continue to shut down plants, kill products and join nontech firms like

Goldman Sachs

in laying off thousands more workers. All of these companies simply have too many people, remnants of an easier, more prosperous time. While a near-term justifiable downside remains for most telecom companies -- both service providers and equipment vendors -- it has become easier to decide where to place some long-term bets.

Investors need to heed a few rules when evaluating companies in their portfolio:

    Cash is king, as cash flow becomes increasingly difficult to judge on an ongoing basis. As such, a simple glance at a company's balance sheet can tell you a lot about whether it's worthy of investment. Now that the huge daily run-ups of telco stocks are gone forever, the potential rewards of any business with questionable viability aren't worth the risk of your capital. Look for real revenue on the books. As tech guru George Gilder and his followers have learned (at least, I hope they have by now), great technology doesn't translate into a great investment. Companies need sales channels, and they need products for which there are immediate uses. The importance of selling to incumbent local exchange carrier, or ILEC, customers -- the telcos that pay the bills -- remains crucial to the equipment providers' survivability. Companies with real products and real revenues that were selling well to the ILECs three years ago will likely find themselves with decent demand during this continuing teleconomy depression. Don't get me wrong --- I'm not putting a glib face on here and denying the seemingly eternal telco capacity for lowered capital expenditures. However, the ILECs are still spending billions every year on equipment. And those billions, while shrinking in magnitude, are increasingly a bigger piece of the telcos' capex pie.

You might be surprised that I didn't mention profitability in that list. Profitability is naturally important, but even companies like Cisco probably won't be profitable this quarter and perhaps for several more, as they'll have to continue aligning capacity, employees and inventory with demand.

Let me repeat the caveat here: You'll never see the type of returns, at least in telecom and telecom-tech stocks, that we saw almost daily in the late 1990s. That's another reason why these tech mutual fund guys, who keep preaching to stay the course, will take forever to get back to even.

PMC-Sierra

(PMCS)

,

Sycamore

(SCMR)

and

Global Crossing

(GX)

will never see triple digits again, so let's just get over it already.

However, let's look at some stocks that I think represent good buying opportunities for those looking to diversify

into

telco-tech. (Are there any people out there who aren't still overweighted in tech/telco-tech?) If you don't own

any

of those names now, the list below represents a few places to nibble. If you already own telco and/or telco-tech, please find out (or have your broker check) whether your companies meet at least some of the criteria above.

  • Enterasys (ETS) : It's a leader or near-leader in several product categories, particularly layer-3 switching, Enterasys is a recent spinoff of Cabletron. The company reports earnings after the close Wednesday, and believe it or not, I don't think the report will suck, as Enterasys sells heavily to enterprises, including education, military and manufacturing. Remember, though, this is not a trading list; putting small amounts of your capital into these companies over the next few months is the idea. The company has nearly a half-billion in cash and no debt and is trading at book value.
  • Cisco: The company still owns the enterprise router business and has begun taking serious telecom market share back from Juniper (JNPR) - Get Report. That trend will continue. It doesn't hurt, either, that it has $17 billion in cash to see it through the hard times. When the company finishes aligning its personnel with the current business climate (i.e., more layoffs), profitability will return.
  • Micromuse (MUSE) : Its Netcool software is best of class, and no one else is even close. The designers covered all the bases when developing this software, which all major telcos -- even large enterprises -- use to monitor their networks. With $163 million in cash and short-term investments and a business that should remain profitable despite these terrible times, Micromuse is trading at a very reasonable entry point.
  • Tellabs (TLAB) : Despite management's often-clumsy handling of new products and upgrades, Tellabs' Titan product line will continue to dominate. The company is sitting on more than a billion dollars in cash, has almost no debt and trades at 1.2 times book value.

Cody Willard is a telecom and Internet infrastructure analyst and consultant. He is also founder of

TelEconomist.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was a senior analyst for Visual Radio, a New York-based venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to

clwillard@teleconomist.com.