Technology stocks have just staged a rally to end all rallies, with doubling and tripling, and even more, the rule rather than the exception.
After such a run, you would expect the so-called smart money managers to bail out.
Yet one of the hottest technology-stock pickers of all, Roger McNamee of T. Rowe Price & Associates, the Baltimore-based mutual-fund company, thinks they're still cheap by historical standards.
McNamee manages T. Rowe Price's hot-performing Science and Technology fund. He was last quoted here in January saying that tech stocks still had a way to go, even though they had already posted terrific gains.
Before that, in October, he told me that he was starting to nibble on what was then a battered tech sector by buying shares in Apple Computer and Adobe Systems.
Both of these stocks proceeded to skyrocket, yet he continued buying them as recently as last week.
To explain, he points to a 20-year chart developed by Morgan Stanley, which compares the price-earnings (PE) multiples of tech stocks with those of the Standard & Poor's 500.
The chart shows that tech-stock multiples hit bottom in October, and that the leap in tech stock prices merely brings the multiples back up to their previous lows, in 1976 and 1987.
Tech multiples are lower, he says, because the earnings of the group as a whole have been declining for years. But he expects weakening earnings in the future from the S&P companies, which very likely would cause their stocks and multiples to fall.
"Individually, there are technology stocks you can point to that are fully priced," he says.
"If you eliminate the losers, whatever else remains, no matter how expensive, will outperform the market.
"The problem with investors," he adds, "is that most people can't tell the difference between the winners and losers in technology, and winners can quickly become losers."
That's why McNamee focuses on specific types of businesses. Right now he would avoid most companies that make disk
drives, so-called character-driven software, computer-aided software, engineering software, and personal-computer clones.
McNamee expects their earnings to grow more slowly in the future.
He also has sharply reduced his health-care holdings (including biotech) to the lowest level since his fund was started in 1987.
"Almost everything good that could happen to them has happened," says McNamee.
Counterpoint: After interviewing McNamee, I met with Scott Black of Boston-based Delphi Management, a confessed value investor. Value investors will buy only low-PE stocks. Growth investors will buy a high-multiple stock if they think earnings will continue growing at a fast clip.
With the S&P at about 17 times this year's anticipated earnings, Black insists that the stock market "is reaching stratospheric levels. Last time they were that high was the summer of 1987."
Black prefers stocks that are selling at 11 or 12 times earnings.
That eliminates most of the most popular growth stocks, such as Coca-Cola (with a multiple of 23), Gap (22), Merck (19), Microsoft (26), and Syntex (20).
He also won't consider such technology stocks as Advanced Micro Devices (65) and Borland (32).
"Over time," he says, "the only strategy that ultimately wins is buying low-PE stocks."