NEW YORK (TheStreet) -- As a group, the information technology industry has been a standout performer, posting 2014 gains of 21.47%, compared to the 8.9% gain in the S&P 500 (SPY) and the 4.71% gain in the Dow Jones Industrial Average (DJI) , according to research firm Fidelity.
This wasn't supposed to happen, however.
The IT/enterprise sector, which consists of software, hardware, cloud and Big Data companies, entered 2014 with only modest expectations. Industry experts projected global IT spending in 2014 would remain stagnant to slightly lower. In some cases, these predictions have been spot on.
Case in point -- After losing 3% of its value in 2013, IBM (IBM) shares are down 17.5% in 2014. The company continues to be hurt by weakness in global IT spending. But that's only part of the problem. IBM is still hurting itself, positing declines of more than 16% over the past three years.
While Big Blue is still a posting strong profits, Wall Street no longer cares about that. It's about survival and growing the top line. This is where IBM has struggled. So for these shares to rebound in 2015, the company must figure out a way to become relevant in an industry that is moving away from on-premise systems to cloud-based systems. Companies no longer want to manage their own servers onsite.
Instead, corporations are embracing the type of on-demand cloud service offered by smaller rivals like Salesforce.com (CRM) (up 7.83%) and Workday (WDAY) (down 0.37%) -- a platform known as SaaS (software-as-a-service).
Under new CEO Satya Nadella, Microsoft looked like a new company in 2014, and it earned the benefit of the doubt from Wall Street. While the bulk of Microsoft's 2014 revenue and profits come from Windows and Office, Nadella is focusing on segments like commercial cloud service, Office 365 and the company's cloud platform Azure.
These are new fast-growing businesses that can lessen Microsoft's dependence on PCs. These segments are growing revenue at a rate of over 100% and yielding 25% gross margins, meaning Microsoft is lessening its dependency of personal computers.
Likewise, Hewlett-Packard (HPQ) , up 40.92%, is perhaps 2014's biggest surprise. CEO Meg Whitman deserves considerable credit for restoring HP's credibility. The degree to which Whitman has executed on HP's strengths is impressive.
What's more, HP should continues to benefit from a stabilizing PC market. Market research firm Gartner, predicts a significant rebound in 2015. Ranjit Atwal, Gartner’s research director is looking for a modest 2.6% PC-shipment increase in 2014, going from 308 million units to 316 million, bringing global shipments back to 2013 levels.
And to the extent Whitman can extract more value from the company's ongoing cost reductions, these shares can still soar in 2015.
Other storylines to keep an eye on in 2015 will involve enterprise storage companies, namely EMC (EMC) (up 17.12%), which is fighting to keep its 80% stake in software virtualization company VMware (VMW) (down 8.68%). EMC has been under pressure by activist investor Paul Singer of Elliot Management Corp to spin off its VMWare stake.
But that's not easy to do, especially since VMware accounts for roughly 22% of EMC's total revenue. Not to mention, owning VMWare gives EMC an added advantage that helps win business over Hewlett-Packard and chief rival NetApp (NTAP) (up 2.92%).
I won't predict whether VMware will remain a part of EMC in 2015. But should EMC decide to spin off VMware or sell its stake, there will be a bidding war. At the top of the list of bidders will be IBM and Hewlett-Packard.
All told, in 2015, investors should buy Cisco, Oracle, EMC and Microsoft. While I don't expect Hewlett-Packard shares to fly as high as they did in 2014, there's enough momentum in the company's improvements to expect a continued uptrend. Likewise, Salesforce should continue to climb on higher cloud adoption rates.
Conversely, investors should stay away from IBM, which has been in a three-year funk. For the same reason, beaten-down companies like Juniper (JNPR) (down 3.15%) and Alcatel Lucent (ALU) (down 19.55%) should be avoided.
TheStreet Ratings team rates INTL BUSINESS MACHINES CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate INTL BUSINESS MACHINES CORP (IBM) a HOLD. The primary factors that have impacted our rating are mixed: some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its notable return on equity, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and a generally disappointing performance in the stock itself."
You can view the full analysis from the report here: IBM Ratings Report