The Anglo File: It's Time for U.K. Investors to Get Choosy

A lack of stock-picking prowess is sending stocks up and down indiscriminately.
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LONDON -- It's time for British investors to get choosy.

At least that's what analysts and hedge fund managers are arguing after watching technology and Internet stocks collapse across the board, only to rally just as indiscriminately.

The

Techmark 100

index, the U.K. benchmark for technology stocks, hit its lowest point since it began trading in February, closing at 3731.57 Tuesday -- 35% off highs set a month ago. By Thursday, the index had rallied to 4152.5.

Arguably, a bit of buying was long overdue. But the lack of discrimination -- or stock picking -- by U.K. investors, make bottom-fishing a difficult business.

"The good and bad have all gone down together," notes David Donnelly, who runs the

Optimal

fund, with 20 million euros ($19.17 million) under management. "The question is, are they all going up together?"

Donnelly isn't taking any chances. On his buy list this morning:

Ericsson

(ERICY)

,

Nokia

(NOK) - Get Report

,

Siemens

(SMAWY)

,

Telefonica

and

Vodafone

(VOD) - Get Report

. These are the companies that stand to profit the most from the Internet, he argues, because they are selling "the picks and shovels" used to build the so-called New Economy.

Nainish Bapna, an analyst at

Nomura

, recommends investing in the new tech sectors, namely mobile-phone-related stocks, ASP-related stocks and communications equipment companies.

Filtronic

is involved in the design and manufacture of customized microwave and millimeter wave-radio-frequency components and subsystems, which are used in wireless-communication infrastructure equipment and cellular handsets.

Much hope is placed on the company's move into large-scale production of gallium arsenide circuits, which are better-suited than silicon-based circuits to run the higher-bandwidth, third-generation mobile phones. Bapna has a buy rating on the company. Nomura has had no investment banking relationship with Filtronic.

This view is shared by

WestLB Panmure's

David Rees, who on Thursday set a price target on the company of 26 pounds. WestLB has no investment banking relationship with the company. Filtronic closed up 178 pence, or 11%, at 17.98 pounds ($28.39).

George Luckraft, manager of the

ABN Amro Equity Income

fund, with 36 million pounds under management, says he's sticking with software companies such as

Macro4

, which acts as an internal backup system for

IBM

(IBM) - Get Report

mainframe computers. Macro4 closed down 5 pence to hit a 52-week low of 910.

Yet, for all the buying opportunities, these professionals say there are plenty of New Economy stocks they're staying away from. Mark Henwood, co-manager of the

One Europe

fund, with 100 million euros in assets, says he's tempted to buy

Lycos Europe

, which has dipped below its IPO price, but is holding off.

"As a manager, you can't afford to discriminate between Lycos and

World Online

," the Internet service provider hovering under a black cloud created by the questionable share dealings of its chief executive prior to its flotation. "You won't see Lycos Europe going up when the rest of the sector is going down. Investors aren't differentiating between the quality of stocks they are buying."

Other forces, in additional to fundamentals, such as new issues and index trackers, are likely to influence these stocks going forward.

For instance, Bapna, the Nomura analyst, cautions against flooding into established companies such as microprocessor designer and licenser

ARM Holdings

(ARMHY)

, just because it has fallen 24% in less than two months. ARM closed Thursday up 206 pence, or 5.7%, at 38.13 pounds.

He explains that ARM is about to lose its rarity value as

ARC Cores

and

Bookham

go public over the next few months and give investors new vehicles with which to play the semiconductor market.

"At present, you have a posse of highly paid analysts falling over themselves to recommend London's only quoted chip company -- this is about to change," says Bapna.

A private banker, who declined to be named, says he also has worries about adding to his position in ARM -- but for a different reason. It's possible that the market-capitalization plunges in these high tech names could knock them out of the

FTSE 100

index when it's recalculated in June. If that were to happen, tracker funds would be forced to sell shares, further depressing the stock.

The FTSE 100 is an index of the 100 largest companies listed on the

London Stock Exchange

, ranked by market capitalization, and is calculated on a quarterly basis. Other companies at risk of dropping out are

Psion

and

Baltimore Technologies

. ARM joined the index in December and Psion and Baltimore were added in March.

"Baltimore has lost about 50% of its market cap since it joined the FTSE," the banker says. "If it falls out the FTSE, then all the tracker funds will have to sell it."

Proving that what goes down, can always go down further.

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