10 Tech Stocks to Drool Over

IT SEEMS AS IF EVERYONE CRAVES technology stocks these days -- and some crave technology companies.

Investors have made tech stocks the market's hottest sector in 2009 -- up nearly 60%, or roughly three times Standard & Poor's 500 Index -- as they anticipate an economic recovery and make wagers on potentially successful new products. Bolstering their confidence is the value major tech companies, especially enterprise-technology outfits that peddle their wares and services to corporate users, have placed on smaller rivals. One recent example: data storage and infrastructure software provider EMC's (EMC) July buyout of smaller storage specialist Data Domain for $33.50 a share, or about an 85% premium to the seller's market price before initial bidding for the company started.

There's more to come. With revenue growth harder to achieve, big tech companies increasingly are looking to grow via acquisition. What's more, when the larger fish buy the smaller fry, they offer them greater scale and pricing power, making it tough for the remaining players to compete in niche markets.

M&A activity has shifted into higher gear in just the past few months, says Paul Deninger, vice chairman of the investment bank Jefferies. The number of tech transactions rose in the second quarter over first-quarter levels, the first such rise in a year. The catalysts? He cites Oracle's (ORCL) surprising bid to buy Sun Microsystems, and Cisco's (CSCO) bold move into the server business. "And it looks like 2010 will be even better than 2009," says Deninger. If it weren't for the recession, "I might even dare call the market 'hot,' " he adds.

Most money managers say they would never buy a stock based solely on the company's attraction as a takeover target. It's just one variable. Yet possible mergers can offer underlying support to tech share prices. It is also important for investors to keep track of who's buying whom to understand the market's changing competitive dynamics and who the ultimate winners might be.

Fundamental and takeover interest overlap on some target stocks. This group includes Riverbed Technology (RVBD), BMC Software (BMC), Juniper Networks (JNPR) and F5 Networks (FFIV). All have solid prospects in enterprise technology. The allure of Lotto-like upsides from potentially rich buyout premiums would be icing on the cake. Without regard to takeovers, analysts and portfolio managers assign these companies price targets that are anywhere from 10% to nearly 40% above recent levels. Other beneficiaries of the new tech environment include Hewlett-Packard (HPQ), Microsoft (MSFT) and Intel (INTC).

FUELING THE SHOPPING SPREE in the tech sector is an intense battle among enterprise-technology behemoths such as HP, Cisco, IBM (IBM), Oracle and Dell (Dell), to become one-stop shops for all the items that make data centers -- the heart of corporate-computing and communications networks -- run more economically and efficiently. Silicon Valley's "co-opetition" system, an awkward combination of competing and partnering, is starting to fray. As a result, the big-footed giants are getting into one another's businesses: Cisco is selling computer servers and Dell is entering the consulting business. Moves such as these are rocking middle-sized vendors of software, hardware and switches.

There are other good reasons for smaller companies to sell to larger ones. While technology spending has become slightly stronger, growth remains tepid and spending is expected to recover slowly. That is putting pressure on mid-sized companies, making it nearly impossible for them to increase revenue at the rates needed to compete. By selling themselves to the giants, these companies can continue to compete and, at the same time, allow founders and big stakeholders to cash out.

"It's an interesting time for the CEOs and boards of these [mid-tier] companies, as they decide what they want to be when they grow up," says Ken Male, chief executive of TheInfoPro, an analytical research outfit that relies on the expertise and insights of executives who buy and use enterprise technology. The firm provides detailed data on which products are used and desired most, and which are losing favor.