Have Logitech (NASDAQ:LOGI) investors lost their minds?

The Swiss superstar of computer peripherals manufacturing reported first-half results last evening and, well, I guess I see some room for optimism here. After badly misreading the gravity of the economic downturn earlier this year, Logitech has finally moved to slash inventories and get its free cash flowing again. Inventories dropped 26% year over year, or almost as fast as sales plummeted (down 30%).

The liquidation of unsold merchandise has unleashed a torrent of tied-up cash, with the result that Logitech generated nearly $115 million in free cash flow through the end of the fiscal year's first half, and the company's war chest now brims with $525 million in cash (versus no long-term debt).

And yes, all this stands in stark contrast to the report's "headline numbers," which paint the otherwise bleak-seeming picture of sales falling fast, and gross margins falling faster (they gave up 630 basis points to end at 27.9%).

Call it a hunch, but I suspect the real reason Logitech shares fared so well today is partially thanks to investor optimism over the release of Windows 7. Microsoft's (NASDAQ:MSFT) new operating system does promise a shot in the arm to computer hardware sales. Hopes of a large PC upgrade cycle have helped propel shares of computer "brains" maker Intel (NASDAQ:INTC), and I wouldn't be surprised to see PC sales surge at retailers Best Buy (NYSE:BBY), Amazon.com (NASDAQ:AMZN), and hhgregg (NYSE:HGG), now that consumers have a reason to unleash their pent-up demand.

Illogical optimism
But how much of that enthusiasm will transfer to Logitech's products? I don't know about you, but when I buy a brand-new computer system -- whether ordering from an established computer maker like Hewlett-Packard (NYSE:HPQ) online (as I did this week) or at a big-box retailer like Best Buy (as I did last year), I tend to buy a unified system assembled by a single manufacturer. It's only months or years later that, disillusioned with failing parts, I begin tricking out the new PC with a few peripheral upgrades.

Foolish takeaway
Granted, when I do decide to replace the comp's original keyboard or mouse, or add on a webcam, Logitech is generally my first choice for quality and value. But remember, this is months or years down the road. In contrast, investors bidding up Logitech shares 4% today seem to be implicitly betting that a near-term surge in sales will follow the Windows release.

Is that a good bet? Or have investors gotten illogically exuberant about Logitech? Scroll down, and sound off.

Fool contributor Rich Smith does not own shares of any company named above.

Amazon.com and Best Buy are Motley Fool Stock Advisor recommendations. Best Buy, Intel, and Microsoft are Motley Fool Inside Value recommendations. Logitech is a Motley Fool Hidden Gems selection and a Motley Fool Options pick. The Fool owns shares of Logitech, and Best Buy. The Motley Fool has a disclosure policy.