Now is a good time to get back into this sector. January 25, 2010 By Chana R. Schoenberger 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% drop from January 20 through January 22 (slightly more than the overall market’s loss). 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 Standard & Poor’s 500-stock index 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 may 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. (See also Where to Invest in 2010.) Advertisement First, tech firms generally don’t carry a lot of debt on their balance sheets. That allows them to snap up other companies when opportunities arise. Second, tech companies are tightly tied to overseas economies; in 2008, Kessler says, the tech companies in the S&P 500 generated 55% of their revenues 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 means more spending by both businesses and consumers. That, too, should benefit tech companies, says Kessler. The sector’s strong showing means that it’s tough to find attractive tech stocks at dirt-cheap prices. But we think that the ten listed below, most of which are well-known companies with medium to large market capitalizations, should perform well in 2010. Applied Materials (symbol AMAT). Companies that make the enormous, expensive machines needed to manufacture semiconductors should see sales jump 50% this year, says Kessler. Applied Materials, 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. Plus, he says, the Santa Clara, Cal., company will also benefit from a higher percentage of overseas revenues than its rivals; in the quarter that ended in October, 85% of Applied Materials’ sales came from outside North America. Applied’s shares sank 7% on January 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 January 22 close). Analysts see the company returning to profitability this year; they expect Applied to earn 60 cents a share in the year that ends this October and 98 cents in the October 2011 fiscal year. Advertisement Autodesk (ADSK). After the real estate bust that precipitated the recession, construction is picking up across the country. That’s good news for this San Rafael, Cal., 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 such as real estate, but analysts at brokerage firm Jefferies predict that Autodesk shares, now $25.10, will hit $30 by year-end. The stock sells at 23 times analysts’ estimated earnings of $1.10 per share for the fiscal year that ends January 2011. That would be an 18% increase over profits of 93 cents a share for the fiscal year that ends this month. Cisco Systems (CSCO). In a severe economic downturn, when companies halt spending for 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 like Cisco. But now that corporate budgets are again expanding, 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 that companies are likely to put more money into networking equipment to link offices. Those trends should lead to higher revenues for Cisco. Headquartered in San Jose, Cal., Cisco has been buying up smaller rivals, such as Tandberg, a Norwegian maker of videoconferencing gear, and Starent, a U.S.-based company that produces broadband equipment for mobile-phone carriers. Jefferies sees the stock, now at $22.97, returning to its November 2007 level of $29 this year. Cisco sells at 16 times analysts’ expected earnings of $1.44 per share for the fiscal year that ends in July. With a market cap of $132 billion, Cisco is the largest company on our list. Hewlett-Packard (HPQ). Since its widely derided 2002 acquisition of Compaq, the deal that sunk the career of then-chief executive Carly Fiorina, Hewlett-Packard has been struggling to get back on its feet. But the Palo Alto, Cal., firm, one of the granddaddies of Silicon Valley, doesn’t deserve its bad rap. Advertisement Its printers, servers and personal computers are selling well, and buying tech outsourcer EDS in 2008 helped boost HP’s business of running other companies’ tech operations. As corporate budgets get fatter, HP should benefit, Kessler says: “This is a great broad-based play on the global economic recovery and a resumption in healthier spending on technology.” The stock, at $49.29, has nearly doubled since the market bottomed on March 9, 2009, and S&P thinks it will hit $67 within a year. Analysts expect profits of $4.34 per share for the fiscal year that ends in October, up from $3.85 the previous year. Microchip Technology (MCHP). This chip maker is a rare tech dividend play. At $26.21, the stock yields a generous 5.2%. “There are only a handful of blue-chip, U.S.-based tech companies that pay notable dividends, and this is one,” Kessler says. Microchip’s products go into a variety of electronics, such as washing machines, blood-glucose meters and control panels for cars, mostly made overseas. The Chandler, Ariz., manufacturer gets 75% of its revenues abroad, including one-fourth from sales in China. S&P sees the stock reaching $33 by the end of the year as sales for both microcontroller chips and analog products improve. Analysts expect Microchip to earn 98 cents per share in the year that ends this March and sees a big jump, to$1.37 per share in the March 2011 year as the economy continues to mend. Micron Technology (MU). Shares of the Boise, Idaho, company, which makes semiconductors for PCs, mobile phones and other gadgets, have quadrupled since last March. However, two forces should fuel additional gains. Advertisement First, there’s an industrywide shortage of the type of memory chip that Micron sells. Plus, businesses will be racing to buy new computers to run Microsoft’s Windows 7 operating system, says analyst Hans Mosesmann, of Raymond James Financial: “We think it’s the start of an upgrade cycle in 2010 that we haven’t seen for many years.” Analysts expect the company to earn 91 cents per share this year and $1.08 next year, reversing a money-losing trend that goes back three years. Mosesmann sees the stock, now at $9.80, hitting $20 by year’s end. NICE Systems (NICE). Every time you hear a message that says “Your call is being recorded,” it’s likely that you’re encountering the product made by this Israeli firm. NICE’s software records and analyzes customer-service calls, Web chats, video conferences, and all kinds of digital files. As companies switch to Internet-based phone systems, and as regulators increasingly require companies such as banks and brokerage firms to record and store this data, they boost their purchases of NICE’s products. Fear of terrorism is also boosting demand for security software from governments and businesses–to download video feeds from security cameras, for example. Analysts look for earnings of $1.72 per share in 2010, up from an expected $1.50 in 2009, and they see long-term earnings growth of 17% a year. At $30, the stock has nearly doubled since October 2008. S&P has a 12-month price target of $39. Nvidia (NVDA). Once, only video-game fanatics cared about computer graphics. Now, with 3D movie sensation Avatar sweeping theaters and high-def video coming to cell phones, everybody seems to care. That’s good news for Nvidia, a Santa Clara, Cal., producer of graphics chips. Nvidia has a series of new Fermi chips that render 3D graphics for PCs, as well as a new chip, Tegra, aimed at phones. “We think there will be very good momentum for these kinds of products,” says Mosesmann. Nvidia lost money last year, but analysts think the company will make 35 cents per share this year and double that next year. The stock, at $16.46, has nearly tripled since November 2008, but it’s still more than 50% below its record high, set in October 2007. Vistaprint (VPRT).The smallest stock on our list, with a market value of $2.3 billion, Vistaprint sells business cards, magnets and other customized marketing products online to small businesses and individuals. It’s a classic example of a service that does well when moved on to the Internet, although Vistaprint does have partnerships with big-box office-supply retailers, such as Office Depot. Based in the Netherlands, the company also offers Web-site hosting, e-mail marketing and other digital-only services. Analysts at Jefferies expect revenues to jump 24% in the fiscal year that ends this June and for earnings to climb 18%, to $1.95 per share, as Vistaprint expands in Europe and Asia. The stock has been on a roller coaster since going public at $12.27 on September 30, 2005. It hit $46 in October 2007, crashed to less than $12 in November 2008 and now trades at $52.41. Jefferies thinks it will reach $65 by year-end. Yahoo (YHOO). Yahoo came under fire when it and longtime search rival Microsoft finally decided last July to tie up their online search-engine and advertising businesses. But now Yahoo, under the leadership of new chief executive Carol Bartz, can stop worrying about Microsoft’s deep pockets menacing its profits and concentrate on regaining online-advertising market share lost to archenemy Google. S&P’s Kessler says operating-profit margins hit bottom in 2008 and should keep climbing. Analysts see revenues rising 7% this year, to $4.8 billion, as more companies move their advertising dollars online. And they expect profits to climb to 47 cents a share, up from an expected 43 cents in 2009. Kessler thinks Yahoo shares, currently $15.88, will trade at $24 by the end of the year.