10 great tech stocks for 2010

By Kiplinger's Personal Finance Magazine

Ever since the Internet bubble popped in 2000 with a cataclysmic market crash, many investors have been wary of technology stocks.

Skeptics got another scare when the sector dropped 6% from Jan. 20 to 22, slightly more than the overall market's loss. They trended down in the past week as well.

We'd argue, however, that the decline only enhances the sector's attractiveness. Now is a good time to get back into tech.

Having long ago shed the taint of dubious companies that were all hype and no profit, the tech sector roared ahead of the market last year. While the Standard & Poor's 500 Index ($INX) returned 26.5% in 2009, tech stocks rose 60%, making tech the market's best-performing sector. (See also "7 lessons from the bull market.")

Although tech stocks and the rest of the market might be in the early stages of a correction, the sector's fundamental picture looks good. Scott Kessler, the head of tech stock research at S&P, offers three reasons the group should continue to advance in 2010:

• First, tech companies generally don't carry a lot of debt on their balance sheets. That allows them to snap up other companies when opportunities arise.

• Second, techs are tightly tied to overseas economies. In 2008, Kessler says, the tech companies in the S&P 500 generated 55% of their revenue abroad. If the U.S. dollar continues to sag, prices of U.S. products will become even more attractive to foreign customers.

• Finally, the end of the recession will mean more spending by both businesses and consumers. That, too, should benefit tech companies, Kessler says.

(See also "Where to invest in 2010.")

The sector's strong showing makes it tough to find attractive tech stocks that are also dirt-cheap. But we think the 10 listed below, most of which are well-known companies with medium to large market capitalizations, should perform well in 2010.

1. Applied Materials

Companies that make the enormous, expensive machines needed to manufacture semiconductors should see sales jump 50% this year, Kessler says. Applied Materials (AMAT, news, msgs), the nation's largest player, sells chip-making equipment of all kinds, including machines that make solar panels and the components that go into solar cells.

"Solar is a nice longer-term opportunity for the company," he says.

The Santa Clara, Calif., company will also benefit from a higher percentage of overseas revenue than its rivals. In its fiscal quarter that ended in October, 85% of Applied Materials' sales came from outside North America. Applied's shares sank 7% on Jan. 22, to $12.63, after a Citigroup analyst downgraded it and other semiconductor-equipment stocks. Still, since February 2009, when the stock dipped to $8, it has risen 54% (all share prices and related data are as of the Jan. 22 close).

Analysts see the company returning to profitability this year. They expect Applied to earn 60 cents a share in fiscal 2010, which ends in October, and 98 cents in fiscal 2011.

2. Autodesk

After the real-estate bust that precipitated the recession, construction is picking up across the country. That's good news for Autodesk (ADSK, news, msgs), a San Rafael, Calif., developer of architectural and engineering software and other related computer products. As building projects start up again, demand for management and blueprint software should increase. It's risky to bet on a tech company so closely tied to a beaten-down sector, but analysts at brokerage firm Jefferies predict Autodesk shares, at $25.10 on Jan. 22, will hit $30 by the year's end.

The stock sells at 23 times analysts' estimated earnings of $1.10 per share for its fiscal year that ends in January 2011. That would be an 18% increase over profit of 93 cents a share for the fiscal year just ending.

3. Cisco Systems

In a severe economic downturn, when companies halt spending on all but the most essential technology, a company that makes routers, switches and other networking equipment is a bad bet -- even if it's a powerhouse such as Cisco Systems (CSCO, news, msgs). But now that corporate budgets are expanding again, Jefferies analysts expect businesses to restart stalled projects to build and consolidate the data centers in which they house their computer servers. Fewer layoffs and growing payrolls also mean companies are likely to put more money into networking equipment to link offices. Those trends should lead to higher revenue for Cisco.

Based in San Jose, Calif., Cisco has been buying up smaller rivals such as Tandberg, a Norwegian maker of videoconferencing gear, and Starent, a U.S. company that produces broadband equipment for mobile phone carriers. Jefferies sees the stock, at $22.97 on Jan. 22, returning to its November 2007 level of $29 this year. Cisco sells at 16 times analysts' expected earnings of $1.44 per share for its fiscal year that ends in July. With a market cap of $132 billion, Cisco is the largest company on our list.

Continued: Hewlett-Packard, Microchip Technology and Micron

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