FRANKFURT Raw materials needed for an economic recovery, semiconductors and luxury carmakers are among the sectors where investors are likely to find the sales growth that has eluded them for the past year.
Increasing revenue will be key for European company earnings in 2010 because it will enable companies to build on the gains from cost cuts forced on them by a global economic slump.
"Sales growth will be the main driver in 2010," said Luca Paolini, London-based equity strategist at Credit Suisse.
But because an economic recovery is not broad-based, the extent to which companies will benefit differs widely, making it particularly important for investors to choose sectors and companies carefully.
Companies that were able to maintain or increase profitability last year and that are poised to win more business this year might be amongst the best bets for 2010.
"Stock picking matters more" than "the bigger macro calls," said Citigroup strategist Adrian Cattley.
Sectors in which to look for potential outperformers include those essential for any upturn such as raw materials and oil and semiconductors, as corporates have to increase spending after postponing investments during the crisis.
UBS analyst Uche Orji estimates a 12 percent rise in 2010 global semiconductor revenue. That might boost chipmakers including STMicroelectronics -- Reuters StarMine predicts a 21 percent probability their earnings will beat expectations.
StarMine weighs analyst estimates according to their past accuracy and compares them to an unweighted consensus -- the higher the difference, the greater the chance the prediction of the consensus is off the mark.
Oil and gas companies such as Statoil as well as miner Anglo American -- both made heavy cuts in capital spending during the downturn -- are amongst the most likely candidates to surprise on sales this year, according to StarMine.
While StarMine predicts an overall revenue growth of 5.5 percent in developed Europe in 2010, oil and gas as well as metals and mining revenues are seen rising more than 15 percent -- these are the sectors with highest probability of surprise.
Oil services company Petrofac recently said it had "excellent revenue visibility, not just for 2010, but beyond."
Utilities and retailers are set to struggle for sales growth, analysts say.
BUILDING ON COST CUTS
The benefits of cost-cutting have been dramatic, and sales growth on top of that -- though tricky to find -- would be an extremely attractive combination for investors.
Average profitability for European non-financial stocks-- if measured as the relation of earnings before interest, taxes, depreciation and amortization to sales -- is near the highest levels of the decade, according to analysts from Citigroup.
"Rising sales coupled with low costs offer the chance of profits growing disproportionately," said Jens Wilhelm from Union Investment, responsible for investment management at Union Investment.
An economic rebound is coupled with governments spending billions of euros on infrastructure, boosting the prospects of companies such as ArcelorMittal, the world's largest steelmaker.
The $500 billion industry has shelved investment plans and cut thousands of jobs -- and now sees light at the end of the tunnel. ArcelorMittal predicts a 10 percent boost in steel demand for 2010.
Better utilization of capacity reduces production costs per unit, another factor enhancing profits, said Munich-based UniCredit strategist Gerhard Schwarz.
"A 5-percent increase in demand for example in the premium car segment leads to more productivity, leveraging companies' earnings," he said.
Premium carmaker BMW cut production heading into the downturn and said it expects to get a lift from the launch of new models in 2010 when double-digit growth in China will offset an expected steep downturn in its home market.
The best time to pick stocks might be in the first half of the year, according to UBS strategist Nick Nelson.
"We expect revenue growth to return in the second half, as we forecast Q3 GDP growth to be positive quarter on quarter in almost all major economies," he said.
(Additional reporting by Shawn Stillman in Boston, Editing by Sitaraman Shankar)