Interesting fact: Over the past few weeks, while warnings from companies like

Intel

(INTC) - Get Report

,

Apple

(AAPL) - Get Report

and

Dell

(DELL) - Get Report

have helped to knock about 1,000 points off the

Nasdaq Composite Index

, a few handheld-device stocks have been rocketing like it's

late 1999.

Boxed In
As PC stocks tumble...

Makers of handheld devices rally

It's a hot new trend with a persuasive fundamental story. But investors with any respect for the dead momentum stocks of yore may want to tread softly on this newly hallowed ground.

Playing Chicken?

Now, the stock market may not be perfectly efficient. But it's not completely stupid, either. The weakness in stocks like Dell and Apple reflects the real long-term growth problems that the traditional computer hardware industry faces. And some on Wall Street are coming to the view that makers of handheld devices -- companies like

Palm

(PALM)

,

Handspring

(HAND)

and

Research in Motion

(RIMM)

-- may be not only beneficiaries of that trend, but also one of its causes.

Drew Peck

, a semiconductor analyst at

SG Cowen

, thinks the profusion of portable devices has fragmented the market for consumer electronics in a way that could be very threatening to PC manufacturers.

"The PC isn't the only game in town," Peck says. "There are a lot of new products -- PDAs, digital cameras, MP3 players -- that are starting to attract dollars. The money has to come from somewhere, and, in my mind, they're coming at the expense of the PC market. And I don't see that ending anytime soon. We're very early in the adoption cycle of these products."

... And the Egg

Ah, adoption cycles. The emergence of the Internet sector in the late 1990s gave investors their most recent lesson in the sort of explosive revenue growth that characterizes the early stages of those. And the new guard has indeed been putting up the big numbers. Sales grew 127% from the year-ago period in Palm's last quarter. Research in Motion, which makes the

BlackBerry

pagers that lawyers and securities analysts carry with the regularity that monks carry their rosaries, posted revenue 121% higher than it did last year. Handspring's sales of its handheld

Visor

and Springboard expansion modules grew a whopping 51% from the prior quarter.

Naturally, the growth of these device makers is based on some extremely easy year-ago comparisons. Handspring, for its part, had sales totaling exactly zero this time last year. But the figures look simply beautiful compared with those of companies like

Compaq

TheStreet Recommends

(CPQ)

and

IBM

(IBM) - Get Report

. And the stocks have reflected that growth. Since the vicious downtrend in technology hardware stocks started accelerating in early September, Palm has gained around 10%, while Research in Motion has added near 20%.

Most striking, though, has been the performance of Handspring. The stock has doubled on a wave of optimism that its soon-to-be-introduced cellular

VisorPhone

attachment will turn it into something of a next-generation

Nokia

(NOK) - Get Report

.

Coming Home to Roost

But like most good vibes that vibrate early in adoption cycles, the clearly huge expectations investors have for the VisorPhone are yet inchoate. No analysts covering the stock have made any public estimations of how many VisorPhones Handspring might be able to sell. (They might start doing that after the company reports its fiscal first-quarter results next week.) So it's difficult to argue with any confidence that the company's current valuation of $8.6 billion is anything close to reasonable, especially with growth starting to slow in the worldwide handset market.

This much is clear: Handspring's VisorPhone has triggered an important shift in the debate about the future of wireless communications. Most who care to think about such things have long predicted a coming, nasty showdown between handheld devices and cellular handsets. Now that the battle has begun, the mobile-phone makers don't look nearly as intimidating.

"A lot of people were really concerned that the

Motorolas

(MOT)

and Nokias and

Ericssons

(ERICY)

were going to wipe out the PDA manufacturers," says Thomas Sepenzis, an analyst at

CIBC World Markets

. "All PDAs were going to be subsumed by wireless handsets. The phone announcement by Handspring was a shot across the bow saying the innovation is going on over here right now." By extension of that argument, Sepenzis says, "It looks like Palm has a chance to become the operating system of the phone." (Sepenzis rates Palm a buy and Handspring a strong buy, and his firm hasn't underwritten for either company.)

Soup for the Soul

Compelling stuff. Staking the claim to the platform of the future has taken stocks like

Qualcomm

(QCOM) - Get Report

,

Red Hat

(RHAT)

and once even Palm itself to precipitous heights. The investors who bought into those dreams in the thick of the frenzy are still smarting.

"I look at these wireless products as special situations," says Barry Hyman, chief investment strategist at

Weatherly Securities

. "People are looking to deploy money away from a weak sector and into a sector that you know is going to be seasonally strong, regardless of valuation. I don't look at these companies and say that Palm is cheap when it's trading at eight or nine times

sales growth, or Handspring is cheap when it hasn't turned a profit." Hyman owns shares of Palm via its spinoff from

3Com

(COMS)

.

"I mean, Research in Motion could be the

Coleco of the 21st century if it's not careful," he continues. "It's just an item."