Since 2009, Buffett has been consistently pouring a lot of cash into buy either common stocks or preferred shares of “great businesses” with declining stock price. Conventionally, the banking business is inside his circle of competence, with the long-term holding of Wells Fargo (WFC) and other smaller banks; he has bought preferred shares of Goldman Sachs (GS) and Bank of America (BAC), the two banks which are considered to have two of the greatest franchises in the world, for around $5 billion each.
Another trend we saw with Buffett buying is the entrance to technology stocks, the industry that he had avoided for nearly all of his life. He avoided the technology industry because he said it was too difficult to predict which tech business would prosper for the long term. But just two years ago, he made his entrance into the technology field with big stakes in BYD in China, and then just today, he announced that he has bought about $10.7 billion of IBM (IBM, Financial) stock this year, effectively making Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) own more than 5% in the company, with the average price of $170 a share.
So what made him change his long-engraved approach to investment? He said it was what he read in IBM’s annual report in fiscal year 2010 and what he has heard from the IT departments in Berkshire subsidiaries. IBM's core business is to provide service and equipment to information technology departments. Buffett thought that the level of loyal customers with IBM services is quite high: “There’s a fair amount of presumption in many places that if you’re with IBM, you stay with them.”
In addition, he believes that IBM has done “incredible job” implementing the long-term strategy, has a sound plan for its future ahead, is very honest with investors and has been doing stock buybacks. “They’ve done all kinds of things right.” With IBM's moat, Buffett described that he had been “hit between the eyes” by how the company finds and keeps its clients. It’s a company to help IT departments to do their job better. “There’s a lot of continuity to it.”
IBM has been the stock that Warren Buffett’s teacher, Benjamin Graham, the father of value investing got exposed from his early life. Graham had shared his thoughts during the luncheon in 1958. During the years of 1926-1946, 20 a 20-year time frame, the multiples of IBM rose from 7 to 42. Today, with relative valuation, IBM is quite reasonably priced when compared with the average five-year multiples. It is staying at a P/E of14 and a P/CF of 11.8, whereas the average five-year P/E is 13.3 and P/CF is 8.1.
What is really interesting about IBM is the company kept buying back shares during the past 10 years. So it kept increasing the level of Treasury stocks in both an absolute level as well as percentage of total assets. In the latest quarter, the Treasury stocks take around 97.5% of the total assets, or $107 billion, offsetting more than $100 billion in the company’s retained earnings. That is why with the first look, the equity/asset ratio is at a very low level of 20%, but it is all because of the very high level of share buybacks. The short and long-term debt all together is only around 27%.
So the $221 billion company, which has been around for more than 100 years, has a strong balance sheet, generating sustainable operating cash flow and free cash flow over time, (they even target a $100 billion cash flow in 2011-2015), with the price tag of nearly 15 P/E and 11 P/CF, is quite a good opportunity for moving a big amount of capital for Berkshire Hathaway.
Things change, and Buffett, with the self-learning machine, has made his move aggressively into the technology field. Let's see how things turn out in the future. How about you guys? What do you think? Please feel free to discuss and leave any comments.
Another trend we saw with Buffett buying is the entrance to technology stocks, the industry that he had avoided for nearly all of his life. He avoided the technology industry because he said it was too difficult to predict which tech business would prosper for the long term. But just two years ago, he made his entrance into the technology field with big stakes in BYD in China, and then just today, he announced that he has bought about $10.7 billion of IBM (IBM, Financial) stock this year, effectively making Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) own more than 5% in the company, with the average price of $170 a share.
So what made him change his long-engraved approach to investment? He said it was what he read in IBM’s annual report in fiscal year 2010 and what he has heard from the IT departments in Berkshire subsidiaries. IBM's core business is to provide service and equipment to information technology departments. Buffett thought that the level of loyal customers with IBM services is quite high: “There’s a fair amount of presumption in many places that if you’re with IBM, you stay with them.”
In addition, he believes that IBM has done “incredible job” implementing the long-term strategy, has a sound plan for its future ahead, is very honest with investors and has been doing stock buybacks. “They’ve done all kinds of things right.” With IBM's moat, Buffett described that he had been “hit between the eyes” by how the company finds and keeps its clients. It’s a company to help IT departments to do their job better. “There’s a lot of continuity to it.”
IBM has been the stock that Warren Buffett’s teacher, Benjamin Graham, the father of value investing got exposed from his early life. Graham had shared his thoughts during the luncheon in 1958. During the years of 1926-1946, 20 a 20-year time frame, the multiples of IBM rose from 7 to 42. Today, with relative valuation, IBM is quite reasonably priced when compared with the average five-year multiples. It is staying at a P/E of14 and a P/CF of 11.8, whereas the average five-year P/E is 13.3 and P/CF is 8.1.
What is really interesting about IBM is the company kept buying back shares during the past 10 years. So it kept increasing the level of Treasury stocks in both an absolute level as well as percentage of total assets. In the latest quarter, the Treasury stocks take around 97.5% of the total assets, or $107 billion, offsetting more than $100 billion in the company’s retained earnings. That is why with the first look, the equity/asset ratio is at a very low level of 20%, but it is all because of the very high level of share buybacks. The short and long-term debt all together is only around 27%.
So the $221 billion company, which has been around for more than 100 years, has a strong balance sheet, generating sustainable operating cash flow and free cash flow over time, (they even target a $100 billion cash flow in 2011-2015), with the price tag of nearly 15 P/E and 11 P/CF, is quite a good opportunity for moving a big amount of capital for Berkshire Hathaway.
Things change, and Buffett, with the self-learning machine, has made his move aggressively into the technology field. Let's see how things turn out in the future. How about you guys? What do you think? Please feel free to discuss and leave any comments.
