The Top 10 PC and Storage Stocks of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.7% gain in 2010. Of course, kindness might still feel relative after a lost decade of negative returns that included the nauseating depths and panic of the financial crisis.

However, while the general market might have edged up at a low double-digit pace last year, quite a few stocks poured in monster performances either by riding new trends or by rebounding much stronger than investors expected.

Here's a list of this year's top 10 performers in the computers & peripherals industries.

Source: Capital IQ, a division of Standard & Poor's. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $500 million.

Computers and peripherals might look like an odd grouping (and it is), but they're grouped together by the Global Industry Classification Standard (GISCS). Despite this classification, what we essentially end up with is two distinct groups. The first is companies levered to PC and peripheral spending, and the second is business storage products and services.

In the computers segment, the situation is largely dismal. Computer companies continue to suffer from commoditization and declining prices in PCs. Not only that, but 2010 saw an extremely rapid acceleration in the pace of smartphone and tablet adoption -- two categories of devices that threaten legacy PC makers and other companies supplying parts like DRAM memory and hard disk drives.

The winners of this shift can be seen in the table above. The overwhelming success of the iPad along with the continuing rapid sales growth of the iPhone propelled Apple to 54% returns, despite the company already being worth nearly $190 billion at the start of the year. At the close of the year, Apple is a nearly $300 billion monster; making it the second most valuable company in the world.

Then there's also SanDisk in the winners circle. Rivals Seagate and Western Digital both produce the hard disk drives popular in PCs and servers while SanDisk's focus is on flash memory, the kind of storage popular in mobile devices like smartphones, tablets, and even digital cameras. While flash memory is more expensive than traditional hard disk drives, it's also much smaller and doesn't require any moving parts that can be damaged, both essential features for mobile devices.

Moving past the computer segment, companies selling advanced data storage to IT departments had a banner year in 2010. The reasoning is simple; we're creating information at a faster pace than our ability to store it. Between stories of media and businesses wanting to keep larger amounts of information for complex data analysis, data growth is booming. Not only that, but a demand for more intelligent ways to store and access information is on the rise.

The situation has created a buyout spree across the industry as companies look to complete their storage product portfolios with advanced technologies. Throughout the year smaller companies like 3Par, Isilon, and Compellent were the source of aggressive bidding battles from larger rivals.

Looking ahead to 2011, storage doesn't show signs of slowing down. However, just because demand for storage solutions should keep growing at a fast pace doesn't mean that next year should see more outsized gains for the industry. First off, most of the buyout bait is off the table. After several billion-dollar deals, there aren't as many storage specialists left to be bought. Second, companies in the storage industry tend to trade at pretty steep multiples. In my recent recommendation for the "Best Tech Stock of 2011," I picked EMC in part because the company was vastly cheaper than its peers after factoring in its stake in virtualization kingpin VMware.

As far as the PC side is concerned, the wave of smartphone and tablet sales growth should continue unabated. The key question for the next couple of years will be not only how quickly these device segments grow, but also how much they cannibalize PC spending. If smartphone and tablet sales come in below expectations or don't cut into PC sales at expected levels, PC-reliant companies like Western Digital could prove to be big winners; the stock trades at just six times earnings.

Although, trading at just 10 times earnings itself, a future-proofed company like SanDisk is still priced pretty cheaply as well.

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