With Chip Valuations Steep, Money Managers Select With Care

At the Robertson Stephens Tech 2000 conference, money managers look hard for good stock values.
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SAN FRANCISCO -- Money managers shopping for tech stocks at the Robertson Stephens Tech 2000 financial conference might as well be looking over the $19-a-pound prosciutto and other offerings at a gourmet deli. The choices look delicious but, boy, are they expensive.

Just look at the

Philadelphia semiconductor index

, which closed Monday at 1066.43, up 34% since the beginning of the year. At those levels, people are making their selections with care.

Instead of smiling at how high their stocks are, money managers seem to be nervously contemplating valuations and making sure they know where the emergency exit is.

One money manager, speaking on condition of anonymity, noted anxiously that while the cyclical chip business seems to be in the third inning of its current ascent, the stocks are trading as if it were the seventh inning.

In a market such as this, people are easily panicked. That's what happened with

Conexant

(CNXT) - Get Report

, a leader in the sizzling market of communications chips. The stock plummeted 16% Monday to close at 96 13/16 after

Qualcomm

(QCOM) - Get Report

announced it would start buying chips from Conexant's competitor,

RF Micro Devices

(RFMD)

. In contrast, shares of RF Micro shot up 21% to close at 138 15/16.

Too many valuations are sky-high, says Robertson Stephens technology analyst Arun Veerappan. "A year and a half ago, 20 times trailing 12-month earnings was considered healthy. Now the worst of the companies are selling at that valuation," he says. "In order to merit these values, a company can't make a single mistake." At the same time, he says, investors are desperate to buy into growing areas, and they seem to be overreacting to good news.

At the conference here, money managers say they are looking hard for good stock values and keeping their ears to the ground for bad news to short on. So there seems to be both a lot of buying and shorting go on.

Michael Ellis, an analyst at

Montgomery Asset Management

, says the market is becoming more concentrated around certain areas, and you have to be able to spot them. "The thing is the market is very smart," Ellis says. "All the money is going into the high-growth areas."

One new market he's watching is storage area networks. In this market, companies outsource the storage of backed-up data clogging their systems. Companies in this market include

Veritas Software

(VRTS) - Get Report

and

Brocade Communications

(BRCD)

.

Kevin Landis, fund manager at

First Hand Funds

, agrees. This market has shown that stocks can be expensive without being overvalued, he says. "The money follows growth, and it keeps flowing," he says. "As a company shows more growth, it attracts more capital."

Marco Petroni, president of

MG Capital Management

, which invests in both public and pre-IPO companies, says there is still a lot of growth left in the market in certain areas. He's putting his money into business-to-business companies that can show substantial productivity gains with their products or services or cost savings for their customers.

"Who would have thought that

Ford

(F) - Get Report

,

General Motors

(GM) - Get Report

and

Chrysler

would have formed a company together?" he says. Their venture to handle auto parts and supplies procurement is expected to result in hundreds of millions of dollars in cost savings, bringing higher profits.

Petroni believes that venture capitalists are throwing too much money at business-to-business Internet start-ups. It's too early to tell which of the new companies will succeed, he says.

That's something every investor seems to have difficulty with, says Robbie analyst Arnab Chandra. "People don't seem to know. Will we have five different

personal data appliances or one smart phone?

"Not knowing which products will succeed, the investment mode of choice is to spot a sector and buy shares of every company in it. "Investors will invest in all the options," he says.

But it can be a troublesome strategy, Chandra says. Before diving into a sector, investors need to convince themselves of strong overall growth potential.

How skeptical is the crowd at the conference? Just about every money manager here admits to shorting at least one stock, though most decline to name which one. One manager, who asked that his name not be used, said he was starting to short enterprise-software maker

Siebel Systems

(SEBL)

.

"I believe the growth rate will decelerate," he said. The big spurt in Siebel's sector came last year, the manager said, because of demand for Y2K-related software.