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Wild Week Has Tech-Stock Buy-Siders Thinking About Safety

Looking at the stocks that haven't had big run-ups.

This week's volatile action shows that no place in the

Nasdaq

is exactly safe for nervous investors, say tech-stock buy-siders. But if you're worried about further drops in tech stocks -- despite Thursday's 2.9% bounceback and Friday morning's continued ascent -- you'd best avoid the companies with the biggest run-ups over the past year, they say.

The situation runs somewhat counter to the market's instinct to go with the perceived winners in various technology sectors, a move that has widened the valuation gulf between supposed leaders and also-rans. That strategy has been in evidence throughout the market these last two days, as beaten-down retailers and financials, among others, have shined following the biotech

rout of earlier this week and last.

Among the high-tech highfliers,

Ariba

(ARBA)

, a business-to-business Internet play that has more than tripled since the beginning of December, has dropped some 20% over the last six days. With scads of similar high-tech stocks having doubled and more in the last six months, there could be plenty of candidates for significant downside if investors turn risk-averse for an extended period.

Selling the Winners

"In the short term, it seems that people are selling the winners," says one tech-fund manager, speaking on condition of anonymity. "The stocks that are being sold in the short term are the ones I'd like to buy in the long term."

The recent tech-stock decline is a reasonable outcome, considering some of the leading stocks have jumped 10- or 20-fold over the last year, says Alan Loewenstein, co-portfolio manager of the

(NTTFX)

John Hancock Technology fund. He cites two stocks the fund doesn't own: fiber-channel supplier

Emulex

(EMLX)

, which recently dropped from a 52-week high that was more than 33 times its 52-week low, and customer analytics firm

E.piphany

(EPNY)

, which went public in September at 16, traded as high as 324 7/8 last week, and closed Thursday at 180 7/8, down more than 3% from the previous day. (Both stocks are up more than 5% Friday morning.)

"These are very extended stocks," Loewenstein says. "This is normal profit-taking."

Talking Risk

Nick Moore, a technology investor at money management firm

Jurika & Voyles

, says the hottest sectors are the riskiest. "Obviously, anything that could be called B2B, and anything that uses lasers, has the highest susceptibility to correction this year," he says, adding that another vulnerable sector is data-over-wireless. "Is it real? Sure. Is it overhyped? Sure," he says.

The safest places to be in tech, said different buy-siders, are the stocks that haven't had recent runs. One anonymous tech-fund manager said that now that

Cisco

(CSCO) - Get Report

has had its recent run-up -- it's about double where it was in November -- it's time to start looking at

TheStreet Recommends

Microsoft

(MSFT) - Get Report

, which is in the same range as it was last April. The fund currently holds Cisco, but not Microsoft.

A hedge fund manager, also speaking on condition of anonymity, suggests technology infrastructure plays like the "low-tech" tower sector. The manager's firm has a big holding in

American Tower

(AMT) - Get Report

, owner/operator of broadcast and cell phone antennas. "It's not a sexy area," says the hedgie. "You've got much more of the investor mentality there. ... You don't have people who are jumping in, trying to make a buck and then getting out."

Another infrastructure sector in which the hedge fund has invested is the cable business, says the manager, including holdings in

Charter Communications

(CHTR) - Get Report

and

Adelphia Communications

(ADLAC)

. "The only problem I see there," the manager says, "is that short-term catalysts in cable are not with the companies. ... You have to really be an investor to want to get in the cable area right now."

Further Horizons

Daniel Barnes, an analyst at the

California Technology Stock Letter

, says he thinks little is safe in this market, given his belief that interest rates will likely rise a percentage point over the next two months. But for people with a time horizon beyond five months, he suggests

3Com

(COMS)

, which has seesawed around the IPO of its

Palm

(PALM)

subsidiary.

Assuming that a Palm-less 3Com -- it's planning to completely spin off Palm to shareholders -- is worth about $25 a share, Palm would have to drop to less than $25 before people who bought 3Com today would lose money, Barnes says. (Palm closed Thursday at 55 9/16, down fractionally.) "We don't think Palm is going to 20 or 25," says Barnes. (Michael Murphy, editor of the newsletter, is chief investment officer of the

(MNWBX)

Murphy New World Technology fund, which owns 3Com.)

Despite the nervousness, Loewenstein says the fundamentals of the technology market are looking good. "At the end of the quarter, who's going to be showing the growth? It's the technology names," he says. "Everybody you're talking to," he adds, "the companies are saying, whatever their metrics are, they're beating them."