UPDATE 1-RESEARCH ALERT-Goldman upgrades US hardware sector

July 10 (Reuters) - Goldman Sachs raised the U.S. hardware sector to "attractive" from "neutral," on expectations of a potential upside in the stocks and the sector to outperform in the seasonally stronger second half of 2009.

The most depressed hardware sector will be the number one area for investment when the economy and IT budgets improve, well above software, networking equipment and services, the brokerage said in a note dated July 9.

"A return to normal seasonal trends in tech should serve as the first catalyst in the back half of the year, followed by increased IT spending and a corporate upgrade cycle in 2010," analysts led by David Bailey wrote.

The analysts expect a 35 percent to 50 percent upside potential in hardware companies' shares.

Bailey upgraded Dell Inc (DELL.O) to "conviction buy" from "neutral," and called the world's second largest maker of personal computers his top pick, expecting an aging installed base and the rollout of Microsoft Corp's (MSFT.O) new Windows 7 operating system to drive a corporate PC upgrade cycle in 2010.

Bailey cut Western Digital Corp (WDC.N) and IBM (IBM.N) to "neutral" from "buy," based on valuation, and said all the advantages of Western Digital have already been priced into its stock.

On IBM, the analyst said the potential upside to the stock's $120 price target is less than the other buy-rated stocks.

Bailey, who favours Dell, Arrow Electronics (ARW.N), Hewlett-Packard Co (HPQ.N) and Seagate Technology (STX.O), also upgraded Seagate to "buy" from "neutral" and raised his price target on HP's stock to $47 from $39.

He also raised his price target on Apple Inc's (AAPL.O) stock to $160 from $145. (Reporting by Manasi Phadke in Bangalore; Editing by Gopakumar Warrier)