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Valuation Silliness Builds Playground for Shorts

Examples include Xilinx and Altera, one analyst says. Plus, more on PacifiCare and Irwin Financial.

Editor's Note: Herb Greenberg's column runs exclusively on; this is a special free look at his column. For a free trial subscription to, click here. This article was published Feb. 15 on RealMoney.

A reminder:

With investors getting spooked by accounting hype, it's important to remember -- as one technology-oriented hedge fund analyst reminds me -- that aside from accounting issues, "There are still a ton of overvalued companies with deteriorating fundamentals that are great shorts. And there are hundreds of others where accounting is not the linchpin. With all this accounting hype, people are forgetting valuations are still incredibly stupid and investors are still ignoring incredibly poor fundamentals."

Such as, he says, priced-for-perfection chipmakers


(XLNX) - Get Xilinx Inc. Report



(ALTR) - Get Altair Engineering Inc. Report

. What's their problem?

This short believes they're vulnerable to a shift by manufacturers away from these companies' key market of Field Programmable Gate Arrays, or FPGAs as they're better known, in favor of ASICs, or Application-Specific Integrated Circuits.

Take, for example,


(CSCO) - Get Cisco Systems Inc. Report

recent earnings conference call in which the company said it's re-engineering products "where we switch out from ... FPGAs to ASICs." Such a shift could have a big impact on both Xilinx and Altera, which get the bulk of their sales from the telecommunications industries.

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Both Xilinx and Altera trade at about 13 times revenue and about 100 times expected earnings for 2002. Also, for what it's worth, Xilinx and Altera trade at higher prices than their 1999 lows, while key telecommunications customers like


(LU) - Get Lufax Holding Ltd American Depositary Shares two of which representing one Report




and Cisco trade well below theirs.

Altera officials didn't return a call from my associate, Mark Martinez. A Xilinx spokeswoman downplayed the concern, telling me such re-engineering happens as products go through cycles. "Our focus is on winning the socket of new products." With such high valuations, investors had better hope this is business as usual.

Sick bay:

Any way you take the scalpel to it, the quality of earnings from



was not high. The company reported fourth-quarter earnings of 34 cents a share, which was 2 cents below expectations.

Joe France from Credit Suisse First Boston notes that the company on its conference call disclosed a nonrecurring "favorable adjustment," or reversal of reserves, of 25 cents a share. "That means fourth-quarter operating earnings were only 9 cents, well below expectations," France wrote. As I mentioned in

TheStreet View

last Tuesday, short-sellers had expected the reserve reversals would be part of earnings.

Gaming it:


(TTWO) - Get Take-Two Interactive Software Inc. Report

got aided in its first hours of trading Friday by what would appear to be short-covering. Who cares about a formal

Securities and Exchange Commission

investigation when the stock can get squeezed?!

Interestingly, the company said that Albert Pastino, its recently departed CFO, quit for personal reasons shortly after he was named to the Take-Two post on Dec. 17. But a call to his previous employer at Aptegrity finds that he's still listed on the directory as an employee there! I left a message; I haven't yet heard back.

Friends in high places:

Irwin Financial


, as expected, sold stock to the public. I hear as much as 30% of the deal is sold to retail investors. (Rule of thumb: the more to retail, the lower the quality.) I also hear, from those who were told directly, that bankers on the deal were telling investors that a big investor in the deal was

Capital Group

, a mutual fund company. If so, do you think they also mentioned that Irwin Financial Chairman Bill Miller is on the board of several Capital Group funds?

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to

Herb Greenberg. Greenberg also writes a monthly column for Fortune.

Brian Harris and Mark Martinez assisted with the reporting of this column.