Investors look to cloud for tech stock picks

By Jim Finkle

BOSTON (Reuters) - Jeffrey Saut simply looks up to remind himself which tech stocks will be hot in 2011.

Saut, chief investment strategist for brokerage Raymond James, says he is betting on companies that are leaders in cloud computing -- using Internet technology to move computers and information away from desktops and into remote data centers.

Despite the surge in cloud computing stock prices last year, investors are expecting an encore in 2011 as the revenue growth for these companies rises faster than the broader technology landscape.

Will Danoff, who manages the $72 billion Fidelity Contrafund, is among the most closely watched investors who has embraced the cloud. He says that the cloud is one of his investing strategies for 2011 because he expects companies that sell into the sector to outperform the broader market.

IT research firm Gartner estimates that companies that sell software as a cloud-based service will see revenue growth accelerate this year, climbing 16.2 percent. Last year sales grew an estimated 15.7 percent.

The sector is drawing attention because its sales are revving up just as growth in overall technology spending is on the decline. Gartner sees worldwide tech spending growth slowing to 5.1 percent this year, down from 5.4 percent in 2010.

MOMENTUM PLAY

Some investors are nervous about the high valuations commanded by cloud computing companies, whose volatile trading has led to precipitous declines on some days last year.

But there is simply too much momentum behind the sector to falter this year. "It will probably still emerge as a leader," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

The optimism on the sector is underpinned by the belief that companies behind them are fundamentally reshaping the way businesses use technology, investors and analysts said.

Cloud leaders like Salesforce.com sell their software through web browsers, saving customers the expense and time of buying and maintaining expensive computer servers.

Besides ease of use, cloud computing saves money by providing huge economies of scale. It offers businesses centralized software, storage and computing services that are less expensive to procure. That model is somewhat similar to the one that online retailers like Amazon use to provide discounted goods to consumers.

TOP PERFORMERS

The big names in cloud computing also rank among last year's top-performing stocks: VMware Inc, which sells software to build clouds, saw its shares more than double in 2011. Salesforce.com, which sells software that workers access over the Internet from web browsers, soared 80 percent.

NetApp Inc and EMC Corp, which both sell equipment for storing data in the cloud, were also top gainers in 2010.

Wall Street analysts say they are constantly peppered with questions from portfolio managers eager to profit from the surge in popularity of cloud stocks.

Industry analysts say that cloud computing projects tend to generate quick returns on investments, which means that companies are able to quickly recoup the money they spend on the projects and see tangible benefits to their businesses.

That resonates with Fidelity's Danoff, who holds cloud players including Google Inc, Amazon, Salesforce, NetApp and Citrix Systems Inc.