BOSTON, Aug 20 (Reuters) - Is tech getting too darn hot?
Money managers worry that it might be.
The five-month rally in technology shares has left them fretting that investors have caught a fresh dose of late 1990s tech fever.
After tech bellwether Hewlett-Packard Co.'s ((HPQ.N)) results fell below Wall Street's expectations on Tuesday, mutual fund managers said they were less concerned about HP and more worried about the overvalued sector.
HP's disappointing profits and sales, released after Tuesday's closing bell, sent U.S. blue chips lower on Wednesday, and led some to worry about whether the tech stock rally would continue.
"There's certainly some who feel that tech has gone too far, too fast, and this is an indication that things aren't as good as the market believed," said Rick Meckler, president of LibertyView Capital Management.
After Tuesday's regular trading session ended, HP reported a net profit of $297 million, or 10 cents per share, for the three months ended July 31.
On Wednesday, HP's stock was the largest percentage loser in the Dow Jones industrial average ((.DJI)).
The computer and printer maker's shares ended Wednesday's session off 10.5 percent, falling $2.31 to $19.80 on the New York Stock Exchange.
Some believed HP's disappointing results were due to in-house problems such as misjudging demand for flat-panel computer monitors and tough competition from Dell Inc.(DELL,Trade). Consequently, they thought HP's numbers would have little impact on the tech sector.
"I think these are HP-specific issues rather than an indication of general weakness in the tech sector," said Chris Traulsen, an analyst at research firm Morningstar Inc. "Fund managers are more worried about valuations."
Since the stock market started rallying from its 2003 lows on March 11, valuations have surged, especially for the tech sector.
TECH ON A TEAR
Technology funds have been on a tear in recent months, topping a list of 20 other stock portfolios tracked by Morningstar. Since Jan. 1, tech funds have returned 35.6 percent; in the past 52 weeks, these funds have returned 24.2 percent.
Large-cap funds, many of which have large holdings in technology giants such as Microsoft Corp. (MSFT,Trade), Dell and Cisco Systems Inc. (CSCO,Trade), came in 10th among the best-performing funds ranked by Morningstar. These portfolios have returned 17.4 percent so far this year and 7.8 percent in the past year.
Morningstar's Traulsen said portfolio managers have avoided semiconductor company shares as they were widely regarded as overpriced.
Ken Smith, who co-manages Munder Capital Management's $280 million all technology Future Tech Fund (MTFAX,Trade), agreed.
"Some valuations are very high, and there really needs to be an acceleration (of profits) to justify these valuations," he said, adding that software companies' share prices were also "higher than we're comfortable with."
TO HAVE AND TO HOLD?
Smith, who said he will hold on to his HP shares, which makes up 4 percent of the Future Tech fund, said the company's sluggish results mirrored most of the technology sector.
"HP has been muddling along for a while. It's been doing a whole lot of nothing," he said. "That's pretty much what's going on in the tech sector. There is still no real upturn that is going to sustain the rally."
The tech-laden Nasdaq Composite Index ((.IXIC)) ended Tuesday's session at a 16-month high -- its highest close since April 2002. The blue-chip Dow average also hit a fresh 14-month high at Tuesday's close. Those milestones were reached just minutes before HP's earnings were released.
To extend those gains, capital spending on technology must pick up, analysts say.
"People will be looking at what could keep the rally going," said Tom Roseen, a research analyst at research firm Lipper Inc., a unit of Reuters Group Plc ((RTR.L))(RTRSY,Trade).
"Capital spending is going to have to rise," Roseen added. "If it declines, all bets are off." (Additional reporting by Vivian Chu in New York)
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