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The co-head of investment banking at one of Wall Street's big firms spoke on background this morning about last week's carnage in tech stocks. His firm, a leader in tech underwritings, is in the midst of postponing or pulling a raft of previously scheduled initial and secondary offerings. These conversations with clients and colleagues are no fun, he said. (Evidently, they are even less fun than breakfast with a journalist.)

But his and other investment banks' momentary misfortune -- please, no tears -- may benefit investors interested in technology companies. To the extent there are fewer tech IPOs and secondary offerings in the pipeline, there will be a smaller supply of new paper over the next six to nine months. And that, he observed, is generally good for tech stock valuations, if you think investors have not permanently soured on New Economy shares. (And even with today's 2.3% drop in the

Nasdaq Composite Index

, there are few signs of that.)

Combine his liquidity analysis with the recent massive repricing of techs, and it seems reasonable to ask, "Can a careful investor pick through the rubble to find some good companies in the months ahead?"

His answer was, "Yes, but this is a new day for tech. We are in a sorting-out period. There will be basically two kinds of tech stocks -- those that come back and those that don't."

Debating Which Companies Survive

That is spot on, according to Tom Galvin,

Donaldson Lufkin & Jenrette's

top strategist, a longtime bull on tech and a guy with a big following among professional traders. (Galvin also thinks that a slower flow of new issues is good for tech.)

"The debate now should be about which companies survive," Galvin said. "We are in a major sorting-out. Tech has hit a major speed bump, and it is not business as usual anymore."

He expects that in the next three months investors will focus attention on B2B companies, followed by internet infrastructure companies and, last but not least, wireless companies.

"The metrics for each sector will be different," he said. "But whatever the measure, companies will be judged based on their ability to survive and prosper. They will have to stand on their own feet in a normal business environment because the market will not put up with any more excuses."

Galvin uses a rough-and-ready triage process to analyze tech going forward. "One-third of the companies will perish from bad management and faulty business plans," he said. "One-third will see the handwriting on the wall and consolidate with bigger, better companies. And one-third will be the ones that survive and dominate."

Galvin has a gorilla list based on DLJ's analysts' top picks. They include, among others:

  • America Online (AOL)
  • Apple (AAPL)
  • Digexundefined
  • EMC (EMC)
  • FreeMarketsundefined
  • Lam Research (LRCX)
  • Applied Materials (AMAT)
  • Nokia (NOK)
  • Yahoo! (YHOO)
  • Qwest Communications (QWST)
  • Amdocs (DOX)
  • PSINet (PSIX)
  • Veritas (VRTS)
  • Siebel Systemsundefined
  • QLogic (QLGC)
  • i2 Technologies (ITWO)

(DLJ has done underwriting for Digex, FreeMarkets and PSINet, and has done both underwriting and investment banking for Qwest.)

No longer, Galvin said, will successful tech investing be synonymous with IPO-flipping. Investors are going to have to do some homework.

Seeking Compelling Tech Values

Mike Murphy, editor of the

California Technology Stock Newsletter

, concurs that tech investors are discriminating among companies in ways they have not for years. "We see a lot of companies whose businesses are in great shape with strong revenue growth, good pricing and good reliable earnings," he said. "There will be a premium paid by investors for those kinds of companies."

He doubted, for example, that an Internet content provider like


would do well in this new environment. "They provide free medical information. They don't sell vitamins," Murphy said. "I wonder if that is a business model that will ever pay off."

He and other tech investors say that you don't necessarily need to stick to the big tech companies that everyone has heard about. One of Murphy's subscribers, who runs a large technology investment firm, agrees. "There are reasonably priced technology companies in both the small- and large-cap areas," he said.

What does reasonably priced mean to this professional investor in the new age of tech?

"We would want to buy companies where the growth rate is roughly equal to their

price-to-earnings ratio," he said. "We are looking for a

price-to-earnings-growth ratio of not too much more than 1. Those are the ones we are nibbling at. If you look hard, you can find companies like that with expanding profit margins and accelerating revenue growth. It may take six months for the market to move them up, but that is where we are focused."

Bottom line, don't rush in to buy the dip. Do your homework. Be prepared to sit and wait at least six months for profits. But don't count tech out.