Warren Buffett is just full of surprises. A week after disclosing that he had dived headlong into stocks dependent on a strong economy, he fesses up to buying 5.5% of the technology giant IBM. It’s like the world has been inverted.
Buffett is famous for favoring steady-growth consumer and financial companies like Coca-Cola and Wells Fargo, not up-and-down industrial firms. He’s even better known for shunning tech, an industry where he believes it is difficult to determine long-term winners.
The New York Times captured this sentiment:
“Amid an Internet stock boom in 1998, he told Berkshire shareholders, ‘Technology is just something we don’t understand, so we don’t invest in it.’ His letter to shareholders for 2000 boasted: “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.”
Yet Buffett’s Berkshire Hathaway recently made its largest quarterly commitment of cash in 15 years with a serious tilt toward holdings that are non-traditional for Berkshire. Is Buffett reaching beyond his comfort zone?
Most Buffett watchers say no. It seems clear that his move into economy-sensitive stocks was about pouncing while prices were down. Of his third-quarter splurge, he said on CNBC: “American companies look very cheap.” Cheap stocks are Buffett’s business no matter the industry. All he needs to do now is wait for the economy to strengthen for those to pay.
The tech story too can be seen as a classic Buffett move. IBM is entrenched in the global I.T. services and software market. Buffett himself has noted that the company has a stellar history of meeting targets and a clearly defined future path. He told The Wall Street Journal: IBM “fits all my principles…it’s something we expect to own indefinitely.”
As reported on CNNMoney:
“’IBM is a classic Buffett stock. It has a reasonable valuation and the company has executed on its strategy flawlessly,’ said Sunil Reddy, a portfolio manager who follows tech stocks for Apex Capital Management in Dayton, Ohio. … Ted Parrish, co-manager or the Henssler Equity Fund in Kennesaw, Ga., agreed. Parrish said Buffett was probably attracted to IBM because of its practice of buying back stock to increase earnings per share — not because of any hot patents IBM owns or because Buffett is now a fan of servers and open source software. ‘I don’t want to say that IBM is the utility of the tech sector but it’s close. We know that Buffett enjoys investing in growth and income,’ said Parrish.”
Yet there may be more at play. For one thing, IBM is not an isolated tech investment. Berkshire also disclosed that it bought shares of chipmaker Intel, another tech giant (as well as DirecTV, Visa, CVS and General Dynamics). Intel has some of the same friendly features as IBM — a long history of growth, market dominance, a dividend.
Maybe what Buffett is signaling is that tech has come of age. There are now proven tech companies in no more danger of becoming suddenly obsolete than, say, Johnson & Johnson (another Buffett holding). Maybe it’s become possible to identify long-term tech winners, and if that were the case why wouldn’t Buffett buy other tech stocks at times when the market is undervaluing them?
I wouldn’t look for him to buy a newbie like Groupon. And he’s ruled out Microsoft because of his friendship with Bill Gates. But Cisco Systems, a dominant router maker, and established computer maker Hewlett-Packard both pay a dividend. In an inverted world, Buffett might be a buyer.