Maxtor (MXO) continued its winning ways Monday, adding 4.6% to the 47% the stock has appreciated since tanking in mid-August. The latest catalyst: an upgrade to buy from hold by Deutsche Bank analyst Gabriel Tsuboyama.

In his Monday note, Tsuboyama said he now believes the maker of hard-disk drives sold about 13.6 units in the September quarter and will sell some 15 million units in the December quarter, compared with his earlier estimates of 12.5 million units and 14.2 million units, respectively.

Although Maxtor sells to all three segments of the hard-drive market -- servers, desktops and consumer electronics -- Tsuboyama figures that sales to gadget makers increased by as much as 40% during the September quarter. (Deutsche Bank does not have an investment banking relationship with any of the companies mentioned in this story.)

Two other hard-drive makers,

Western Digital

(WDC) - Get Report

and

Seagate Technology

(STX) - Get Report

, also have shared in the summer rally, up 45% and 36%, respectively.

However, all three companies are still far below their opening prices for the year: Maxtor, which lost some of its lucrative

Dell

(DELL) - Get Report

business, at least temporarily, is off by about 50%, Seagate is off by about 26% and Western Digital is off by about 20%.

The rally poses something of a dilemma for investors in Maxtor, indeed for all three companies, which are the only pure-play drive makers still publicly traded. Should you take profits now, or hang in there, estimating that the second half of the year, with back-to-school and holiday sales, is likely to be fairly strong?

The bear case was made with admirable brevity by Piper Jaffray analyst Les Santiago in a note published last week. "Take profits," he wrote.

Similarly, Michael McGarr, vice president of Becker Capital Management, which owns close to 3 million shares of Maxtor, said, "I don't think the

hard-drive makers' rally has much more steam."

Santiago noted that Maxtor has been boosted by persistent rumors that it could be sold, but he rates a takeover at a significant premium "at less than 50%." (Piper Jaffray does not have an investment banking relationship with any of the companies mentioned in this story.)

Despite the recent run-up, Wall Street doesn't have a lot of confidence in any of the companies to substantially grow their top lines. Analysts polled by Thomson First Call expect Seagate's revenue to drop 5% in fiscal 2005; Maxtor's, they believe, will fall off 11% in the comparable period. Western Digital, though, is expected to grow revenue by about 3%.

"This second-half momentum does not make for an investment case," said Matthew Smith of CIBC World Markets. "Valuations

of all three companies remain excessive, and once the seasonal tailwind has abated, we see a more difficult first-half outlook," he said in a note to clients.

Smith values Seagate at 35.3 times his forward earnings estimate, which, he wrote, is "high relative to its historical forward-looking range of 12 times to 21 times." Western Digital, which he calls the most attractively priced of the three suppliers, is valued at 18.4 times earnings, also high compared with its historical range of 9 times to 12 times.

Maxtor cannot be valued on a P/E basis because it is not projected to be profitable in the next two years. (CIBC does not have an investment banking relationship with any of the companies mentioned in this story.)

Analyst Jim Porter of Disk/Trend, a market research company that specializes in storage, has a more positive view of the sector. "The companies are acting like grownups at the moment. That helps a lot." As anyone who has followed the sector for a period of time knows, the drive makers have a history of "immature" behavior, including

cutthroat price competition and channel stuffing.

Earlier this year, one drive maker, generally identified as Seagate, started pushing too much product into the distribution channel, forcing the competition to follow suit.

But according to Porter, the resulting buildup of inventory has finally been drawn down. Also significant, he said, are growing opportunities to sell hard drives for use in consumer electronics.

In early Tuesday trading amid a broad downturn in tech stocks, shares of Maxtor were down 13 cents, or 2.3%, to $5.56; Seagate had lost 29 cents, or 2.1%, to $13.76; and Western Digital had fallen 15 cents, or 1.6%, to $9.33.

All three companies will report quarterly financial results later this month.