After a run-up this spring, shares of PC companies and chipmakers have recently hurtled back toward earth, and that's given rise to some tentative optimism on the Street.

Consider: the S&P semiconductor industry group has dropped 43% from its year-to-date high in March, while the PC group is off 27% from the same date. In response to the recent swoon in valuations, this week Lehman upgraded ratings on some chip stocks, while SG Cowen issued a note pointing out that some beaten-down chip names were trading near cash levels.

But don't think it's time to jump in just yet. Money managers say that although stock prices of PC and chip outfits have cratered, they're not cheap enough given that nobody's buying the stuff. While singling out names that will profit despite the downturn -- one favorite theme is Asian foundries -- pro stock-pickers remain wary of companies whose profits hinge on a recovery in demand.

"I think this down cycle is probably worse than any other one I've seen, and I've been in the business since the mid-'70s," said Walter Price, manager of the

(DRGTX) - Get Report

Pimco Global Technology fund. "The recovery has been a lot less dynamic than a lot of previous recoveries.

Tech stocks turned down before the economy; it got worse when the economy turned down, and when the economy picked up, it's not been as dynamic on the upside."

Still Too Early for Optimism

Despite analyst comments on improving valuations, Zack Schafran, who manages the

(USTFX)

Waddell & Reed Science and Technology fund, still considers the semiconductor overvalued. The extent of global economic recovery remains unclear, he said. "You have to lay on top of that that there's no killer app, so people are not as pressed as they used to be to replace PCs every year. The three-year replacement cycle is becoming a three-and-a-half-, four-, five-year cycle." He expects PC growth to drop further before turning around, with weak unit sales compounded by pricing pressures.

Schafran has stakes in market leaders

Hewlett-Packard

(HPQ) - Get Report

and

Dell

(DELL) - Get Report

based on their longer-term prospects: He likes H-P's strong R&D and broad product line, while he expects Dell to gain share.

"Having said that, we're not big owners of either stock," he said. "We think they've got some time" before the stocks see substantial upward moves.

Consensus estimates for some leading tech stocks remain too optimistic, Price said. "If you look at First Call, they have growth rates for

Microsoft

(MSFT) - Get Report

in the mid to high teens and

Intel

(INTC) - Get Report

in the mid to high teens, and I think those numbers are too high. I think it's like 10% or less."

He remains worried about the outlook for capital spending. "Our view is that capital spending is a function of corporate cash flow. Corporate cash flow grows more or less with earnings, and that's in the mid single digits," he said.

But despite weak corporate cash flows, Price is betting that companies will have to start replacing computers as the current stock wears out. His firm commissioned a survey of 150 companies that showed 28% planned to replace PCs in the next nine months, he says. His fund has added to holdings in Dell and H-P in the past few months.

Though he's still underweight in semiconductors, Price holds out the possibility that he could add to existing stakes in

Samsung

and

Micron

(MU) - Get Report

based on their position in the recovery cycle: "The DRAM guys were the first ones to see the weakness, so they should be the first to see the strength in terms of the price and the supply-demand."

Still, other money managers have been actively trimming PC-dependent areas like semiconductors. Robert Conlon, manager of the

(IASMX) - Get Report

Investec Asia Focus fund, has cut back semi holdings on worries of more downward earnings revisions. "The problem seems to be the lack of a recovery in tech demand in the U.S., and our fear that analysts have in recent months been forecasting an improvement that may not occur as quickly as they expect," wrote Conlon in an email from his Hong Kong office.

Some Faith in Foundries

While demand for PCs and chips remain in doubt, one corner of tech has benefited despite the downturn: semiconductor foundries, which are poised to profit as more chipmakers outsource their manufacturing. Just this week,

Motorola

(MOT)

said it would expand its relationship with

Taiwan Semiconductor

(TSM) - Get Report

.

"As we're moving to a fab-less model, a few foundries are basically aggregating demand for the industry," explained Price. That's "going to allow them to grow faster than the industry."

All three money managers cite Taiwan Semiconductor and

United Microelectronics

(UMC) - Get Report

as solid stock picks. On a price-to-book basis, Taiwan Semi and United Microelectronics are trading below their historic averages, and both also trade at discounts to their historic P/E ratios, said Conlon.

Another favorite: Korea's Samsung, also owned by all three funds. Waddell & Reed's Schafran said he expects the company to notch up its share of the global cell phone handset market from around 10% today to 15% in the next three years, based on its product innovations and competitive pricing.

Among other picks, Schafran singled out

Analog Devices

(ADI) - Get Report

for its diverse product lines and innovative abilities, and Lucent spinoff

Agere

(AGRA)

. Despite its lame performance, he thinks Agere has "spectacular technology." "They're probably not going to make money into the middle part of '03, but they've done remarkably well in reducing their cost structure," he said.

But with the exception of a few bright spots, managers sound distinctly unenthusiastic about the longer-term prospects for bedrock areas of tech like PCs and chips. Expectations still need to be ratcheted down, they say.

"It's hard to get your mind around the idea that growth rates are back to mediocre levels," said Price. Yet that's actually closer to the historical norm, he added. "Growth was mediocre except for a few companies for this industry for 20 years, until the mid-'90s. Then it became extraordinary."

In the wake of that outsized growth, a reversion to the mean shouldn't come as much of a surprise.