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Tech Industry

2HRS2GO: Tech pool good for a dip, but not a long swim

COMMENTARY--Salomon Smith Barney's most recent suggestion for tech stocks appears optimistic on the surface.

A title of the latest industry note from Salomon equity strategist Tobias Levkovich would seem to say it all: "It May Be Time to Wander into Tech Land."

But Levkovich isn't really all that upbeat. He's not yet telling anyone to buy and hold for a long time.

Market cliché tells people to buy at the floor of a cycle. And Levkovich has amassed some hard and not-so-hard figures that show a market bottoming out.

"Within the fundamentally measurable indicators, we can see that downward revisions have hit 80 percent, the Fed is easing, orders and backlog are falling, pricing is getting very aggressive, valuation measures are coming in and the last high quality name hold-outs finally have given in to market pressures," Levkovich noted. "Within the more 'touchy-feely' indicators, sentiment is turning down, analysts downgrades and target price reductions have become the norm and there is a growing sense amongst portfolio managers that the forever growth stories are not what they were purported to be."

Less than 31 percent of people surveyed last week by the American Association of Individual Investors indicated bullishness. "An eight month low!" Levkovich exclaimed.

His own investment firm is helping drive that sentiment lower. Salomon chip analyst Jonathan Joseph--the first sell-side analyst to correctly predict the chip industry slowdown--this week called for more hard times in his sector. Semiconductor issues led a market decline this morning.

You can see how Levkovich might detect a bottom for the sector. Except he doesn't.

Salomon's report is nothing more than an attempt at playing the market for the moment.

"We consider this potential rally to be of a trading nature given the lack of any clear fundamentals and our continued fears of overcapacity in the tech sector," Levkovich wrote.

Those are the sentiments that long-term, fundamental-based technology investors ought to consider. Analysts might be backpedaling furiously and prices might be far below last year's peaks, but the industry still has something to prove. Any near-term tech rebound is likely to be short-lived and limited to safe bellwethers.

"The hot momentum names are no longer where investors are going because they are looking for value within tech," he wrote. "Thus, the likely 'trading opportunity' winners could be some of the old tech type names with lower risk multiples."

Those include IBM (NYSE: IBM), EMC (NYSE: EMC), Lexmark (NYSE: LXK) and contract electronics manufacturers such as Flextronics (Nasdaq: FLEX). Hardly exciting stuff. Heck, three of those names trade on the stuffy Big Board.

Levkovich's thesis really is just an extension of a good old flight to quality, and in some cases, it's already happening. Look at the recent performance of IBM, Lexmark and the Nasdaq Composite Index:

And despite that Nasdaq slump, the tech industry still might not have shaken everything out, Levkovich said. Technology shares have fallen to "much more reasonable levels," but the industry remains bogged down with too much product for now.

"Tech stocks still are not cheap, management teams remain a bit too ebullient, and we find some tech companies still painting a very positive portrait for 'their' spaces," Levkovich said. "Hence, even despite our intermediate term excess capacity fears, there still are other reasons not to be calling for a clear tech bottom, but rather a trade off the recent lows."

So wander into tech land if you want. Stroll down a few safe paths, check out some decent plots of land.

But you might want to hold off on a lengthy stay right now. 22GO>