Why Warren Buffett Is Buying, and You Should Be Too

November 28th, 2011
in contributors

Money Morning Article of the Week

by Keith Fitz-Gerald, Chief Investment Strategist, Money Morning

Legendary investor Warren Buffett (pictured) recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.

Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.

Follow up:

And guess what, it's exactly what I've been counseling investors to do since this crisis began - bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").

According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).

In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.

Buffett Pulls the Trigger

As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.

Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.

There are technical similarities, too.

For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News andYahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.

Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.

Coke is up tenfold since then. Enough said.

Here's what I think Buffett sees:

  1. IBM has shed its personal computer businesses and returned to its roots as a century-old technology company. I believe Buffett sees this as an opportunity to capitalize on further budget cutting and the need to do more with less. So-called "right sizing," or making technology work harder, has long been a strength for IBM.
  2. Big cash flows. IBM has enjoyed 25 straight quarters of per share profit increases -thanks largely to former-CEO Sam Palmisano, who gutted the place and who rebuilt IBM's core computer services businesses. The company's first female CEO, Virginia "Ginni" Rometty took over last month and is expected to provide strong leadership, so I expect this trend to continue.
  3. Increased per-client revenues. In downturns, it's easier to do business with companies you already have on board than it is to acquire new customers. IBM has a long history and deep client relationships that can likely be "farmed" to be worth far more than the changes to new technology providers would cost.

Unfortunately, these three things also tell me that - despite his very public pronouncements that things are on the mend - Buffett is girding for more turmoil.

They also suggest to me that Buffett really doesn't care. He's making investments that are devoid of concerns for volatility and short-term market fluctuations because he knows that value never goes out of style.

Buffett also knows that by properly concentrating his wealth, he's better off playing defense in this environment. He noted as much in last year's annual Berkshire shareholder letter.

So if you think that timing the markets is a good idea, yet you aspire to the kinds of returns that have made Buffett one of the all-time investing greats, think again.

The ability to find and buy distressed investments is becoming more difficult by the minute in today's markets, so you have to concentrate on growth if you want to get ahead - even if the payoff is not immediate.

Related Articles at Money Morning:

Warren Buffett's $24 Billion Bet on the U.S. Market

Warren Buffett is Taking Berkshire Hathaway Inc. (NYSE: BRK.A , BRK.B ) on the Hunt for Takeover Targets

Berkshire Hathaway (NYSE: BRK.A, BRK.B) Share Buyback Proves Stocks Are Bargains

Warren Buffett Emphasizes Investment Risk Management With Successor Pick Todd Combs

Playing 'Follow the Guru' Can Be Fun - and Profitable - for Investors

Related Articles at Global Economic Intersection:

Investing blog articles by Keith Fitz-Gerald

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