Beyond Berkshire Hathaway's well-known aversion to most tech stocks, its sheer size dictates taking large stakes in equally large companies -- otherwise the impact of its investments would be so small as to be nearly non-existent. With that in mind, three stocks that may not fit in Buffett's wheelhouse, but are well worth a look from individual investors, include data-security upstart FireEye (NASDAQ:FEYE), tech-measurement provider FormFactor (NASDAQ:FORM), and midstream energy partnership Phillips 66 Partners (NYSE:PSXP).
Too bad for Buffett
Tim Brugger (FireEye): Though its stock price is down the past week, ahead of second-quarter earnings results scheduled for Aug. 1 after the close, FireEye is likely to continue its successful transformation to becoming a lean, mean, cloud-based, subscription-selling machine.
Last quarter's meager 3% jump in sales beat FireEye's own guidance and analyst expectations, but took a backseat to its recurring revenue and significant cost-cutting initiatives. FireEye's $180.8 million in operating expenses in the first quarter were still higher than its $173.7 million in revenue, but that was an impressive 29% decline. Not bad given that CEO Kevin Mandia just began FireEye's transition last summer.
An emphasis of FireEye's plans is paring sales and marketing costs, which it did by 23% to start the year, as well as cutting administrative expenses by 35%. With the early success of FireEye's shift to building a foundation of subscription-based revenue, don't be surprised to see more of the same this past quarter.
An impressive 86% -- or $150 million -- of FireEye's first-quarter revenue was derived from its subscription and services unit. It generally costs less to drive ongoing subscription revenue rather than rely solely on new product sales, so FireEye's efficiency efforts should continue to move it closer to its primary goal: a return to profitability.
FireEye is hardly out of the woods, but it's already making strides in the early stages of a successful transformation. That's why it's one of the most intriguing data-security stocks around.
Too tiny for Buffett
Keith Noonan (FormFactor): Since its market cap is roughly $1 billion, Buffett probably couldn't take a significant position in FormFactor without buying a controlling stake in the company. The famed investor's noted aversion to the tech sector might give him further reason to avoid the stock, but for the private investor, FormFactor has the potential to deliver powerful returns over the long term.
The company specializes in manufacturing probe cards for testing the functionality and performance of semiconductors -- not a flashy business, perhaps, but one that will play a fundamental role in the evolution of technology hardware and trends like the Internet of Things. Last year saw FormFactor complete its acquisition of Cascade Microtech -- formerly its biggest competitor -- giving the merged company a commanding position in its corner of the semiconductor industry. A report from VLSIresearch anticipates that the market for advanced probe cards will grow at a compound annual growth rate of 7% over the next five years; with roughly twice the market share of its leading competitor, FormFactor is in position to be the biggest beneficiary.
With its factories becoming more efficient, the mobile industry still growing (albeit at a slower clip), and a new range of devices set to feature processing and mobile baseband chips for internet connectivity, FormFactor's business has significant tailwinds. The company looks to have a sustainable edge in a crucial product category. And trading at just 13 times forward earnings estimates, its stock stands out as a good way to invest in the broader semiconductor industry.
A higher-yielding, lower-risk Buffett stock
Matt DiLallo (Phillips 66 Partners): One of Buffett's largest holdings is refining, midstream, and chemicals giant Phillips 66 (NYSE:PSX). In fact, he is its largest shareholder, having invested more than $6 billion into the company, giving him an outsized stake of more than 15%. It's clear that Buffett has an affinity for the energy giant.
However, for many investors, Phillips 66 is riskier than they'd like because it has direct exposure to commodity prices. Last year, for example, both its refining and chemicals businesses saw their profits plunge due to pricing and other issues. A better option might be to invest in its midstream master limited partnership Phillips 66 Partners, which at just $5 billion in size is a bit too small to move the needle for Buffett.
What makes Phillips 66 Partners such an attractive alternative is that it gets all its revenue from fee-based contracts, which enable it to generate steady profits in good markets and bad. That allows the company to pay out more cash to investors each quarter, evidenced by its higher current yield of 4.6% versus 3.1% for its parent company. Furthermore, thanks to its stable cash flow and strong balance sheet, the company has been able to build and buy a steady stream of fee-generating assets over the past few years, enabling it to increase its payout by a 34% compound annual rate since 2013.
Meanwhile, with several growth projects under construction and more acquisitions from its parent in the pipeline, the company should continue growing its payout at a healthy clip for years to come. Add it up, and Phillips 66 Partners is a low-risk, high-yield alternative to one of Buffett's top holdings.
Keith Noonan has no position in any stocks mentioned. Matt DiLallo owns shares of, and The Motley Fool owns shares of and recommends, Berkshire Hathaway (B shares). Matt DiLallo owns shares of Phillips 66. Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends FireEye and FormFactor. The Motley Fool has a disclosure policy.