Though most of tech got whomped last year, the leading data storage stocks emerged unscathed, with leaders like

EMC

(EMC)

and

Brocade

(BRCD)

up 22% and 108%, respectively.

After all, companies that make devices and networks to store information are among the few that can still legitimately lay claim to Internet boom-era growth prospects. But some market watchers are unnerved by the stratospheric valuations of the stocks, even as businesses have started to slash budgets, while others wonder what the effect of a steep economic slowdown on the sector would be.

One piece of the puzzle will slide into place later this week, when

Network Appliance

(NTAP) - Get Report

reports earnings on Thursday. Although a weak quarter may indicate increased competition from 800-pound rival EMC, an earnings disappointment from NTAP is still likely to be viewed as an ominous sign for the whole storage sector.

For now, fund managers remain most

enthusiastic about EMC, though many have smaller stakes in other names. The biggest player in the area with a $158 billion market cap, EMC has a massive sales force and a reputation as a fierce competitor. The company recently set its sights on the high-growth network-attached storage appliance area of the market that up to now had been dominated by Network Appliance.

William Schaff, a manager for the

(BINVX)

Berger Information Technology fund, owns EMC but has sold off holdings in Network Appliance because of concerns about competition from EMC. "People see EMC as a gorilla in the space," he says.

EMC is also considered to have the most solid products. "What EMC has to offer is a high-end product that is super-reliable, and MIS managers don't get credit for trying to save X amount of dollars and take the risk of the system going down," says Jim Chen, a portfolio manager and technology strategist for

Roger Engemann and Associates

, an investment management firm that owns EMC, Brocade and

Veritas

(VRTS) - Get Report

.

EMC has managed a slight gain this year, up 5.3%, while big names like Network Appliance (down 30%) and Brocade (down 8.8%) have lost value on fears that they'll be more susceptible to a slowdown in the economy.

In a sign of just how nervous investors have become, Brocade recently got pummeled after a

Goldman Sachs

analyst said she didn't expect to

see more upside surprises at the company, and pointed out that its rate of growth could start to slow. She said nothing about anticipating

bad

news from the company, though.

Even EMC has shown signs that it's not infallible. Last month, investors sat up and took note when the company didn't jack up expectations as it usually does when it reports earnings. By some accounts, the hard-driving approach that had characterized EMC's guidance in earlier times was gone, replaced by something a little humbler.

To be sure, EMC CEO Mike Reuttgers said he didn't expect to

see a slowdown in storage purchases in the first half of the year - which would seem to make data storage look pretty appealing compared to other areas of tech. But not everyone is so hopeful about spending.

Some analysts think even so important a product as storage could be vulnerable to cuts in IT budgets. "We believe the slowdown in IT spending in 2001 will impact even critical components such as storage," wrote Dane Lewis, an analyst at

Robertson Stephens

, in a report. "This is a change from our previous position that storage would remain relatively stable through leaner IT spending."

And there's no question businesses will be curtailing their spending. According to a December survey of 50 U.S. chief information officers conducted by

Merrill Lynch

analyst

Steve Milunovich, the average IT budget was expected to increase by only 5% this year. That's only about half last year's growth of 11%.

Still - and this is the salient point for institutional buyers -- storage ranked second after handheld devices on a list of items in which those executives expected to see the fastest growth.

Industry analysts forecast a tremendous increase in the need for storage.

The Meta Group

predicts that by 2004, companies will have to manage 10 times as much data as they do today.

Many investors thus see the growth in storage as a trend so powerful that, in the near term at least, it's relatively impervious to the ups and downs of the economy. David Walker, a portfolio manager for the

(VTFAX)

Van Kampen Technology fund, expects the market to turn up in the second half of the year, as rate cuts kick in and year-on-year earnings comparisons get easier.

But if he's wrong, he thinks companies like EMC will do well anyway. "Because this is a big secular trend, it would be a blip and not an inflection point," Walker says. "And I don't think we'll see earnings disappointments with the leading companies, though we may see, somewhat, a more cautious guidance."

From an investment standpoint, only a few names offer pure plays on the storage theme. While older tech companies like

Compaq

,

Dell

,

Hitachi

and

IBM

have started to make inroads into the storage area, they're mostly competing in cheaper, mid- or low-range products. Chen of Roger Engemann points out that a name like EMC offers a pure play on storage, while storage still contributes only a small percentage of overall revenues at a company like Dell.

Most of the managers interviewed for this story say they aren't adding to positions, saying they've had holdings in storage for a while. But in a sign of faith, neither have they been taking profits, despite the stocks' extremely high valuations.

Exiting the stocks now would be a mistake, they say. "Invariably the time to get back in is when things are obviously going well," says Matthew Considine, a manager at

(PGIAX) - Get Report

BlackRock Large Cap Growth. "The nature of these types of stocks is that it's difficult to capture those moves."

In any case, individual investors might want to consider that some fund managers may have little choice but to sound bullish on market leaders. One analyst points out that even if managers doubt whether a stock like EMC merits a

P/E of 91, there aren't many liquid, large-cap alternatives for investing in data storage. "Where do

buy-side investors go if they sell EMC?" he asks. "If you've got to be invested in tech, there are not a lot of places to go if you abandon EMC and Veritas."