3 Tech Stocks Even Buffett Could Love

Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has never been keen on investing in cutting edge technology. He famously ignored the frothing dot-com bubble to instead shop for traditional businesses like MidAmerican Energy and Benjamin Moore. In the aftermath of the dot-com collapse, Buffett looked like an absolute genius, but his aversion to investing in high technology roots is more deeply rooted than a one-time bubble.

Two main reasons stand out:

  1. As a value investor, Warren would rather pay for companies with hard assets that provide him with a margin of safety. Since technology stocks often rely on intellectual property of nebulous value and heady growth assumptions, they're less attractive to his investing style.
  2. Warren likes to buy companies he understands, and technology stocks are well outside his core competency of consumer goods, industrials, and insurance and banking.

Still, throughout his investing career, Buffett has shown an ability to reinvent his investing style. He branched out from the teachings of Ben Graham to understand the value of a strong brand. Later, Charlie Munger shifted Warren away from buying "cigar butts" (i.e., decaying businesses selling at excessively low prices) to "excellent businesses selling at a fair price."

Last year the company even broke its long-standing stance of not investing in cutting-edge technology when it invested in BYD Company, a Chinese auto manufacturer that focuses on advanced rechargeable batteries.

With positive comments on BYD still fresh in my mind from Berkshire's annual meeting last Saturday, there are a number of technology stocks today that even Warren Buffett could love. Not that Buffett or Munger are primed for a high-tech buying spree, but here are three stocks that exemplify qualities the Oracle himself could appreciate.

1. IBM (NYSE: IBM  )
IBM has a number of qualities that Buffett would find extremely attractive. Its brand, built through decades of technology leadership, is still synonymous with cutting-edge technology solutions. Through its hardware-plus-software-plus-services model, IBM has become a one-stop vendor with extremely high switching costs for large enterprises.

Beyond that, Buffett also values strong tenured leadership at the front of his favored organizations. IBM has been led by Samuel Palmisano since the beginning of 2002. Under his stewardship, the company has relentlessly squeezed new efficiencies out of a lumbering bureaucracy, nearly doubling operating margins and entering new high-margin areas that support its pre-eminent position in the world's data centers. The cherry on this delicious investment cake? It's priced right at just 12.5 times trailing earnings.

2. Google (Nasdaq: GOOG  )
I know this might sound crazy. After all, Google is one of the greatest growth stories of the past decade -- not exactly Buffett's cup of tea. However, weigh these quotes from Buffett and Charlie Munger at the press conference following Berkshire's shareholder meeting last year before making any Google judgments:

Charlie Munger: "Google has a huge new moat. I've probably never seen such a moat."

Warren Buffett: "Some keywords cost $70 for a click, and this creates its own positive feedback loop and momentum, that's an incredible business"

Charlie Munger: "It's a wide moat, full of sharks and alligators, and it's getting wider."

What both Buffett and Munger realize is that like operating systems, there are numerous traits that lead search to be a natural monopoly. Beyond the advertising pricing positive feedback loop Buffett alluded to, there are also exorbitant costs to creating and maintaining a data center that can provide speedy results. These costs have led Microsoft (Nasdaq: MSFT  ) to crushing online losses as it tries to build out capacity to handle a larger search load. Also, the more data a search provider has, the more relevant its results. Whoever has a dominant share should only see the quality of results lap their lesser competitors.

The list goes on and on until you realize that Google controls a market whose dynamics lead to a single, dominant player. With all this in mind, Google is trading at only 10% above the S&P 500's aggregate forward P/E ratio. What was that phrase again? Oh yes, "a fair price for an excellent business."

3. Activision Blizzard (Nasdaq: ATVI  )
From the point of view of understanding the business, Activision Blizzard isn't overly complex. While the technology behind video games might be daunting, at their core video games are a leisure activity. Still, you don't see Buffett investing in movie studios or other companies fighting for consumer's entertainment dollars. That's largely because the economics of the industry haven't been great. Companies have lumpy cash flows, and knowing which company will strike a streak of hits is more luck of the draw than some sort of bankable competitive advantage.

However, Activision Blizzard has created a new, powerful business model in the gaming industry. Through its robust World of Warcraft series, it draws a recurring, consistent cash flow stream. In addition, the company's focus on quality has led to a slew of popular gaming series that can dependably deliver excellent results for years to come.

While technology might not be dominating Berkshire Hathaway's portfolio anytime soon, there's a number of quality companies out there with traits that even a crusty old value investor like Buffett could love. As seen in the company's BYD investment, given the right circumstances, Berkshire's willing to branch out to scoop up attractive companies in just about any industry. If you're looking for deals in today's market, don't overlook some of the opportunities in this rapidly recovering sector.

Make sure to go to http://www.fool.com/events/berkshire2010/ to follow all of the Fool's coverage at Berkshire Hathaway's annual meeting.

Fool contributor Eric Bleeker owns shares of Berkshire Hathaway. Berkshire Hathaway and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Activision Blizzard and Berkshire Hathaway are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard and Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (31)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 03, 2010, at 5:07 PM, 102971 wrote:

    You make no mention of ATVI's legal problems which might have an enormous effect on earnings if they lose their case. I own ATVI and intend to keep them but I think that it is irresponsible of you to not mention their legal wrangle

  • Report this Comment On May 03, 2010, at 8:04 PM, ndcljc wrote:

    ATVI's legal problems have settled with World of Warcraft in China... I think its irresponsible of you to not know that ;)

  • Report this Comment On May 03, 2010, at 8:21 PM, goldenfetus wrote:

    I think 102971 is talking about the recent legal issues with the former heads of Infinity Ward, concerning Modern Warfare 2......not anything to do with WoW

  • Report this Comment On May 03, 2010, at 9:54 PM, TMFEditorsDesk wrote:

    Hi 102971,

    Unfortunately with these kinds of articles writers really don't have the word count to go through an exhaustive analysis of different factors affecting a company.

    That said, the basic thesis for ATVI - a strong recurring cash flow, excellent management focused on protecting brands/series for long-term value - remains strong even in the face of legal problems. Call of Duty is obviously a very strong series, but I personally see the Blizzard side as a bit more of a crown jewel of the business, due to the exceptional management of all series and enthusiast following they enjoy.

    Best,

    Eric Bleeker (TMFRhino)

  • Report this Comment On May 04, 2010, at 1:21 AM, kenrexb wrote:

    i think, you think...what the hell???

  • Report this Comment On May 04, 2010, at 12:56 PM, ChrisFs wrote:

    I'm not so impressed by ATVI, They have a P/E of over 100. Sure WOW is very popular, but it doesn't seem to be raking in insane amounts of cash, like people would seem to think. It didn't move much at all in the last year.

  • Report this Comment On May 06, 2010, at 11:43 AM, mikecart1 wrote:

    I owned ATVI for over a year and made lousy returns as the stock was worthless between 2009 and 2010. Didn't move with market, just stays there. I have my own info that there were insider things going on that kept the price down with the CEO exercising options at the worst times for common shareholders. No surprise the stock has dropped again. Glad I sold for about 30% profits. Still had higher hopes. With everything it has going for it now, the stock should be a lot closer to $20/share, not $10/share.

    I smell fraud. Don't tell me I didn't warn ya. I smelled GS fraud a mile away in 2009 when I told everyone to get away from that liar of a bank. Now look whos right!

  • Report this Comment On May 08, 2010, at 3:15 AM, mrshastri wrote:

    Gotta agree with 'mikecart1' Fraud everywhere. I will keep my money under my pillow.

  • Report this Comment On May 11, 2010, at 12:01 PM, mannykay wrote:

    Folks companies do not just start emerging or to be successful until they go through some mistakes. ATVI is a fantastic stock. It may not look appealing now for some of we investor, but i do think it has potential to grow. I even think it can grow as high as $30.00 as time goes on. All it need is time and maybe in the future a buy out from a lucreative company.So I believe in this company and it intentions.I am sticking with this company.

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