The top five tech stocks of 2009

IBM, Hewlett-Packard and McAfee are turning lemons into lemonade this year, and their prospects are strong for 2010.

By TheStreet Staff Dec 1, 2009 12:53PM
high tech © Corbis

TheStreet.comBy James Rogers, TheStreet.com

 

The U.S. economy has struggled this year, but the following tech stocks weathered the storm and look like good bets for 2010.

 

IBM (IBM): "No one ever got fired for buying IBM," so the old adage goes, something the tech giant hopes will hold true in a future full of software, services and cloud computing.

 

The numbers: IBM, which recently posted third-quarter results, has been one of the recession's big success stories, thanks to its shift toward higher-margin technologies.

 

Bing: More about IBM

 

This message is resonating with investors as they emerge bleary-eyed from the recession; IBM's stock has risen almost 50% this year and the company has attracted admiring glances on Wall Street.

 

Once synonymous with mainframes and high-end hardware, the Armonk, N.Y.-based firm now faces off against Oracle and Microsoft, as well as Hewlett-Packard's EDS services giant. Big Blue even snapped up security software specialist Guardium earlier this week in an attempt to bolster its business analytics unit.

 

There is method to this madness. IBM expects its software profit to reach $8 billion this year, up from $7.1 billion in 2008, and $2.8 billion in 2000.

 

The stock: Despite IBM's performance, the company recently said that business had not returned to normal levels. With the tech giant not expected to show sales growth in the fourth quarter, it has even been suggested that investors could find stronger growth at other tech firms, such as storage specialist NetApp, whose shares have more than doubled this year.

 

Hewlett-Packard (HPQ): Shares of the computer maker have climbed more than 35% this year, as the company expanded its services business and contained costs.

 

The numbers: Hewlett-Packard’s earnings met Wall Street's estimates in its most-recent quarter, and predicted a return to growth in 2010. Analysts boosted prices targets and estimates in response.

 

The company's shares, however, slipped immediately after, as investors reacted to weakness in Hewlett-Packard's printer division and the impact of lower-priced PCs.

 

Looking to emulate IBM's global services behemoth, Hewlett-Packard's EDS division is a key weapon in its armory, particularly in emerging countries such as China.

 

Hewlett-Packard is also gearing up for a major showdown with its longstanding partner, Cisco, which entered the server market earlier this year. With its planned $2.7 billion acquisition of 3Com, Hewlett-Packard will gain a launchpad to sell into China, as well as challenging Cisco with a broader networking portfolio.

 

The stock: Although it may take some time for investors to reap the benefits of the 3Com deal, the acquisition signals Hewlett-Packard's intent to become more than a server and PC maker.

 

Oracle (ORCL): Oracle made plenty of headlines in 2009, thanks to its controversial acquisition of Sun Microsystems and its subsequent antitrust battle with the European Union.

 

The numbers: Sun, which has been suffering from execution problems in its server and storage businesses, seemed like a strange target for Oracle when the $7.4 billion deal was announced. Sun, however, can increase Oracle's enterprise presence and give CEO Larry Ellison access to software technologies such as Java, Solaris and MySQL, which is the focus of the EU probe.

 

The database giant missed Wall Street's sales estimate in its most recent quarter, but was still touted as a good bet by analysts, who pointed to its strong gross margins and solid second-quarter guidance.

 

With a massive $20.6 billion in cash and investments, Oracle could also conceivably walk away from the Sun deal without too much damage to its long-term strategy. Ellison, however, has showed no signs of giving up on Sun.

 

The stock: Oracle shares dipped shortly after it announced the Sun deal, although its stock has risen almost 25% this year.

 

McAfee (MFE): McAfee has become the poster child for cybersecurity. The software maker, which competes with Microsoft and Symantec, touts its wares as a way for businesses and governments to avoid computer attacks such as the one that targeted the White House and U.S. financial institutions earlier this year.

 

The numbers: McAfee has enjoyed high growth and share gains, beating the likes of Symantec. The company's third-quarter results marked McAfee's 15th consecutive quarter of double-digit revenue growth.

 

McAfee also renewed its deal to sell software pre-installed on Dell PCs, and remains a darling of the analyst community.

 

It has not been all smooth sailing, though. McAfee's third-quarter earnings were hurt by costs related to its MXLogic acquisition and other charges, forcing its profit down even as revenue reached record levels. The Santa Clara, Calif.-based firm also faces a stiff challenge from newcomer ArcSight and market share leader Symantec, which is unwilling to relinquish its crown.

 

The stock: McAfee's pluses outweigh the minuses. With year-to-date gains of just over 13%, McAfee may not be the fastest-growing stock on this list, but remains one of the best-positioned companies in its sector.

 

Symantec (SYMC): Like McAfee, Symantec is benefiting from increased spending on cybersecurity, comfortably beating analysts' earnings estimates for the most recent quarter.

 

The numbers: Although consumer and small-business sales helped boost Symantec's latest numbers, the company has not had the easiest of years. The software maker missed analysts' first-quarter profit and sales estimates, as customers focused their attention on short-term contracts.

 

Symantec also missed Wall Street's fourth-quarter sales forecast, weighed down by foreign exchange pressures and a tight IT spending climate.

 

With spending starting to rebound though, things are looking up, and Symantec has already beefed up its cybersecurity strategy.

 

The Cupertino, Calif.-based firm is also keen to tap emerging technologies such as Software-as-a-Service (SaaS). During the company's analyst day earlier this year, CEO Enrique Salem predicted that Web-based software services will account for 15% of its total revenue in the next five years.

 

Salem, who succeeded John Thompson earlier this year, plans to cross-sell its archiving and backup software, and target small-to-medium-sized businesses, a strategy that seems to be working.

 

The stock: Even faced with tough competition, Symantec's shares have risen a creditable 30% this year. McAfee may be grabbing most of the plaudits at the moment, although there should still be plenty of cybersecurity dollars for Symantec in 2010.

 

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