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Rising from the Tech Wreck

Most execs also say they see little evidence in their order books that tech sales will be anything but lackluster for the next two or three quarters. With revenue growth still virtually nonexistent, companies are meeting or exceeding their earnings forecasts largely through cost-cutting instead. Even HP CEO Carleton S. Fiorina, while crowing about earnings that beat Wall Street expectations by 2 cents a share, was cautious about the months ahead. "At this point," she warned on Nov. 20, "we don't see any meaningful improvement in [tech] spending or capital spending."

Still, investors aren't all shooting at shadows. The success companies have had cutting costs to the bone means that many have strong leverage in their profits once demand does return: Even a modest rebound in orders will fall straight to the bottom line. "The minute the orders come in, these stocks will shoot straight up," says Jerome Dodson, manager of the $280 million Parnassus Fund, who now has 45% of his holdings in tech stocks.

Until then, however, the bargain hunters who have been jumping into tech for the past six weeks can be expected to go only so far. Unlike the go-go fund managers who snapped up tech stocks at ever-higher prices in the '90s, these folks don't seem willing to keep buying. After picking up Applied Materials Inc. (AMAT ) for $11 a share, Marty Whitman, manager of the $2.3 billion Third Avenue Value Fund, admits he wouldn't touch it at its current $17. And after scooping up 12 million shares of Sun Microsystems Inc. (SUNW ), Bill Nygren, a portfolio manager at the $3.6 billion Oakmark Fund, is done with his tech shopping. "In general, I do not think tech stocks are as attractive as nontech stocks," he says.

Where is demand likely to pick up first? Investors are keeping a close eye on software and services, which IDC expects will grow by more than 10% next year. Cash-strapped corporate tech buyers are looking for low-cost alternatives to the pricey solutions they once snapped up, such as software that renders computer networks less complex. J. Clifford Dodd, chief information officer at health insurance giant Kaiser Permanente, says he is shifting money into technologies that will digitize and organize patient records while simplifying Kaiser's network.

Chip demand, meanwhile, has started to wake up in some sectors. Intel Corp. (INTC ), the world's biggest supplier of flash memory chips, announced on Nov. 25 that prices would rise as much as 40% on Jan. 1. The reason: Cell-phone and handheld makers are adding memory-intensive applications, such as digital music players and cameras, to high-end devices. Intel rival Advanced Micro Devices Inc. (AMD ), which sorely needs a revenue boost, says it has begun to benefit from the trend, too.

Most hardware manufacturers, however, have yet to see much change. CIOs these days aren't interested in buying much beyond cheap servers--and then only if the old one sorely needs replacing. IDC predicts hardware sales will increase by just 1.9% in 2003. But that's a lot better than the nearly double-digit declines of the past two years.

It should come as no surprise that the companies positioned to take advantage of the economy's returning strength are the familiar trio of Microsoft (MSFT ), IBM, and Dell (DELL ). All three have emerged from the downturn stronger than ever. Now, Microsoft and IBM are each pitching integration software to solve companies' complexity problems.

Meanwhile, Dell continues to be the picture of a company doing it right. In the hotly contested server market, for example, Dell is selling $4,000 devices that compete head-on with competitors' machines selling in the six figures. Such low-priced gear has allowed the company to continue to steal market share from rivals throughout the downturn.

Indeed, despite tepid demand for computer hardware, Dell is one of a few companies to consistently show revenue gains. With unit shipment up 28% in the third quarter over the same period in 2001, the company booked 22.5% higher sales--easily the best performance among tech's heavyweights. It's a smart way to do business in a soft market. And, as the sector begins to improve, smart tech investors will put their money on companies--like Dell--that are well-positioned for the coming rebound.

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