Warren Buffett: Berkshire Hathaway’s Top 3 Tech Stocks
Why Warren Buffett Stock Picks are Watched Closely
There is a reason why people call Warren Buffett the “Oracle of Omaha”; it’s because Warren Buffett stock picks tend to outperform the market, especially over the long term. But what about Warren Buffett tech stocks? How do they perform?
Although the Oracle has an incomparable investing record, he has usually steered clear of technology stocks. Buffett has always claimed that tech companies are somehow beyond his comprehension; something he can’t or won’t understand.
“To Buffett, computers were just tunnels that enabled him to reach other people who could play bridge,” wrote Alice Schroeder in The Snowball, her biography of the investor. “Buffett had a long-standing bias against technology investments, which he felt had no margin of safety.”
Despite these public disavowals, Buffett’s investment fund, Berkshire Hathaway Inc. (NYSE:BRK.B), has quietly loaded up on technology stocks.
So sprinkle a little salt on claims that the Warren Buffett portfolio is tech-free. It’s simply not true. More to the point, it’s slim pickings on the stock market these days. How can any investor make a return without dipping their toes in the tech sector?
The S&P 500 declined one percent in 2015 while “FANG” stocks – Facebook Inc, Amazon.com Inc., Netflix, Inc., and Alphabet Inc (Google)– averaged gains of 83%. Tech stocks were by far the best performing sector last year! (Source: “How FANG Stocks Could Bite Wall Street,” Fortune, January 12, 2016.)
If you think last year was a fluke, then go look up the world’s biggest companies in 2016. Just last year, Warren Buffett’s Berkshire Hathaway was in the top five beside Exxon Mobil Corporation, but both firms got knocked off this year.
Who took their spots? Funny you should ask. Take a look below:
Like I said, technology stocks dominate the market – that is fact. These are the companies driving the future, and better still, they’ve finally learned to make a profit. So, given the scarcity of yield, even the great Warren Buffett may have to swallow his pride, eat his words, bite the bullet… whatever metaphor you choose. My point is that Buffett has little choice but to accept that tech stocks bring home the bacon.
That’s why his fund has started making strategic investments into a select group of tech stocks. He may be an old-fashioned, eccentric, Midwestern native, but he’s logical to a fault. That’s why Warren Buffett’s stock picks tend to pay off big-time.
But how do we know that Warren Buffett tech stocks will perform as well as the rest of his portfolio? After all, he is a newcomer to the sector. All I can say is that his tech stock picks still adhere to his value investing philosophy, so that makes them part and parcel of the Warren Buffett portfolio.
A Warren Buffett Portfolio of Tech Stocks
Buffett doesn’t just look at stocks; he looks at the companies underneath them. He likes to know what a business does, where its revenue comes from, and why its rivals can’t poach market share. Then he decides whether the stock is trading at a discount.
He’s looking for real value. Not only did that strategy make him one of the richest people on the planet, but it has also made Berkshire into a giant conglomerate. In any case, let’s take a closer look at the top three Warren Buffett tech stocks.
1. Apple Inc. (NASDAQ:AAPL)
The second quarter of 2016 was Apple Inc.’s worst quarter in recent memory. Despite reporting $50.6 billion of revenue, the company was mauled by investors who saw only one thing: a slowdown in “iPhone” sales. To be more specific, the market was anxious over sales in China. There was a crescendo of bad economic data in the run-up to Apple’s announcement, which effectively baked panic into the market.
No wonder Apple’s share price fell 13% when it reported lower sales for the first time in 13 years. It didn’t matter that Apple generated $10.5 billion worth of profit, or that it had laid out a winning strategy for growth – market sentiment had turned on AAPL stock. Fear triumphed over reason. (Source: “Apple Reports Second Quarter Results,” Apple Inc., April 26, 2016.)
But like Warren Buffett always says, “Be greedy when others are fearful, and fearful when others are greedy.” That’s why every time bears overrun the market with pessimism, Warren Buffett is close behind, scouring the wreckage in search of hidden gems.
He seems to have found one in AAPL stock. According to filings with the U.S. Securities and Exchange Commission, Berkshire bought $1.02 billion worth of Apple stock during the first half of 2016. Any way you slice it, this means that tech is playing an increasingly important role in the Warren Buffett portfolio.
Clearly Buffett is seeing something that few others were patient enough to notice. He sees that Apple has moved from a two-year product cycle to a three-year cycle. He sees the release of “Apple Music”, “Apple TV”, and “Apple Pay”. He sees enough to convince him that AAPL stock is a steal as long as investors are pouting over weak iPhone sales.
No idea what I’m talking about? Let me explain…
Apple has a billion active devices around the world. But people are upgrading less frequently, which means the company needs to find alternate sources of income. Apple has finally realized that new income would have to be driven by services, so they’ve poured money into music streaming, video streaming, and a mobile payments system.
All three features add genuine value to the devices that Apple users already know and love. That’s what makes Apple a Warren Buffett tech stock; the fact that Apple is becoming a service provider. Since Buffett bought AAPL, shares have risen more than nine percent. (Source: “Shares of Apple Have Soared 9% Since Warren Buffett Revealed His Stake,” Fortune, May 26, 2016.)
2. International Business Machines Corp. (NYSE:IBM)
Buffett’s interest in IBM stock was one of the earliest signs that he had softened his stance on technology stocks. In the second quarter of 2011, he started gobbling up shares at an astonishing pace. By the end of the quarter, he had amassed an 8.5% stake in IBM, one of Berkshire’s four biggest positions. Even though IBM stock dropped in the years since, Buffett still believes that the company is headed for a rebound.
“IBM continues to be profitable and generate significant cash flows,” Buffett said. “We currently do not intend to dispose of our IBM common stock and we expect that the fair value of this investment will recover and ultimately exceed our cost.” (Source: “Warren Buffett: Still Loves IBM Despite $1.5 Billion Loss As Of 2nd Quarter,” Forbes, August 10, 2016.)
There are plenty of reasons to believe he’s right. Sure, IBM stock had been threatened by the emergence of cloud computing, but it’s now armed for that fight. According to a recent report from Gartner Inc, IBM’s infrastructure services are projected to reach $24.9 billion, up 42% from the same time last year. They also have deep ties to corporations around the world, giving them a leg up on younger competitors. (Source: “IBM’s Cloud Position: Two Different Assessments,” The Wall Street Journal, August 7, 2016.)
Considering that 90 to 95% of the world’s companies are still offline, there is obviously a ton of potential here. IBM stock can soar as it rakes in cloud computing profits, so I expect to see it in the Warren Buffett portfolio for a long time to come.
Well, I also expect that because it’s what Warren Buffett said. In an interview on CNBC, Buffett said of IBM stock: “”We would be much more likely to buy more in the next 12 or 24 months than we would be to sell shares, but we will make that call as time goes along.” (Source: “Warren Buffett says more likely to buy IBM shares than sell: CNBC,” Reuters, May 2, 2016.)
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3. Verizon Communications Inc. (NYSE:VZ)
Some people might question whether Verizon deserves to be included in my list of Warren Buffett tech stocks. Isn’t it just a communications company? Two things on that score:
- No. It’s classified under technology.
- Verizon provides internet, entertainment, and information services, all of which are built on top of the company’s enormous tech infrastructure. If all of the firm’s segments have something in common, it’s most certainly tech, so doesn’t that make it a tech company?
Don’t confuse “Internet companies” for “tech companies”. The latter is a much broader term that includes the likes of Verizon Communications Inc. (NYSE:VZ). Now that we have that out of the way, let’s look at why Warren Buffett is into VZ stock. Berkshire currently has an $811.3 million stake in the company, which predates the acquisition of Yahoo! Inc. by about two years. (Source: “Berkshire Hathaway Form 13-F Filing,” U.S Securities and Exchange Commission, last accessed August 11, 2016.)
Unless you’ve taken refuge at the bottom of a garden pond, I’m sure you’ve heard that Verizon is buying Yahoo!’s core assets for $4.8 billion. Verizon also bought AOL, Inc., giving them two of the biggest tech/media corporations in existence. (Source: “Verizon is Buying Yahoo for Nearly $5 Billion. RIP Yahoo!,” Time, July 25, 2016.)
If they can imitate Google and Facebook by drawing in advertisers, VZ stockholders could start to see an unbelievable upside. It shouldn’t too hard, considering the popularity of Yahoo!’s sports and finance sections, not to mention all the traffic from Huffington Post.
On top of all that, Verizon has a juicy dividend, strong business model, bold acquisitions for growth, and deep enough roots to block out competition. I’m not at all surprised to see VZ stock in the Warren Buffett portfolio. It’s a stable company with enormous upside.
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