Stocks: Industries to Watch in 2010

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"We think you're going to have to be selective," Smith says, but his fund owns Abbott Laboratories (ABT), which underperformed in 2009 with a return of less than 2%.

In a year full of uncertainties, several investors said they will be looking for firms and industries with steady, predictable earnings. "We think earnings visibility is going to be key," Smith says.

Tech Trend Continues

Eric Cinnamond, portfolio manager of the Intrepid Small Cap Fund (ICMAX), thinks the stock market's expectations for the economy in 2010 are too high. "Instead, [I'm] focused on stable companies that are not as susceptible to a letdown on the economy," he says.

Among small-cap stocks, he likes the rent-to-own industry, where he owns both Rent-A-Center (RCII) and Aaron's (AAN). The firms have navigated the recession well, he says, and profits should improve in 2010. The stores are some of the few places many Americans will be able to get credit, Cinnamond says.

Tech industries were stock market favorites in 2009, and many investors believe that could continue in 2010.

Roy Williams, chief executive of Prestige Wealth Management, favors information technology stocks, saying he expects firms to boost spending on IT this year. After years of cutting back on expenditures, "you're going to have corporations spend money," he says. "They need to." He owns Cisco Systems (CSCO) and Oracle (ORCL), but believes smaller firms could also benefit from buyouts from larger tech firms, which have lots of cash on their balance sheets.

Another tech trend attracting attention is the increasing importance of high-speed broadband Internet. "The growth of broadband continues to be huge even during tough economic times," says Russell Croft, manager of the Croft Value Fund (CLVFX). He owns Cisco, classified as part of the communications equipment industry, which also includes Qualcomm (QCOM) and Harris Corp. (HRS).

ETF Plays

One way for investors to play their favorite industries is by buying shares in exchange-traded funds, or ETFs. In recent years, Wall Street has created narrowly focused ETFs designed to capture particular industries, everything from aerospace and defense to the timber industry.

But there are dangers with a narrow approach, warns John Merrill, chief investment officer at Tanglewood Wealth Management. "An ETF works well if it's [replicating] a broad-based sector or asset class," he says. Investors should beware of ETFs with a narrow focus or consisting of less liquid investments like bonds or microcap stocks, he says.

Merrill favors tech, so he owns shares of the PowerShares QQQ (QQQQ) ETF, which replicates the performance of top large-cap tech stocks.

The market's crazy course in 2009 amply demonstrates how difficult it is to predict what a new year holds. But, by focusing on the broad trends that will lift or sink industries, investors might find ways to make 2010 profitable.

Steverman is a reporter for BusinessWeek's Investing channel.

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