Darius of http://investmentunderground.com/
Buffett has always been a bit of a luddite, embracing industries and business he understands rather than diving into the world of microchips, semiconductors and technology in general.
But what if Berkshire Hathaway did decide to add some technology names to its portfolio?
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
We decided to run a screen of tech companies Buffett might consider. (For another screen we ran of 12 Buffett-friendly names, see here.) We filtered for companies that would “move the needle” so to speak, with a market of over $2 billion, a dividend yield of over 1%, returns of equity of over 15%, a current ratio of over 1, and price to free cash flow ratio of under 15. Here’s what we came up with…
Broadridge Financial Solutions (BR): Though grouped in the tech sector, this is certainly a company Buffett understands: BR provides investor communication, securities processing and clearing and outsourcing solutions to the financial services industry. And with a $2.8 billion dollar market cap, strong cash flows, a 2.7% dividend yield, and a near monopoly in the proxy voting business, it’s easy to see why Buffett might consider Broadridge a buy. An added bonus? Other value investing titans like David Einhorn, Whitney Tilson, Mario Gabelli and Third Avenue Management hold a stake. According to data provided by GuruFocus, all these investors added positions in the $21 range, a good indicator that there is still value in BR at $22.23 per share, the price at the time of writing.
China Mobile ADR (CHL): China Mobile enjoys its 70% market share due to well respected brand, excellent coverage and scale efficiency. As mobile phone penetration continues to grow at rates of other emerging markets, CHL will be an obvious benefactor due to its size ($70 billion in sales) and its dominant position in the PRC: The firm has 575 million subscribers, making it the largest mobile phone carrier in the world, and has 3 times the subscriber base of its nearest local rival. Along with its competitive moat, the company has a strong balance sheet, only $5 billion in debt and $46 billion in cash. The company is essentially government run, and so we think the risks of it losing its competitive advantages are low given entry barriers and substantial government investment to CRL’s benefit. The upside the increasing mobile penetration rates in China and an appreciating yuan relative to the dollar make CHL an intriguing buy at $49.40.
Millicom International Cellular (MICC): Another mobile carrier focused on emerging markets, MICC is the market leader in six of the thirteen countries in which it has wireless service: Chad, Paraguay, El Salvador, Guatemala, Honduras and the Democratic Republic of the Congo. In total, the company provides mobile phone services to close to 40 million people. Though a great play on emerging market cellular growth, the company does face many geopolitical risks, especially in the Africa, where the company operates in war-torn countries such as Rwanda. However, investors looking for high yielding (2.43%) exposure to frontier markets in Africa, MICC could have a place in your portfolio, at the right price, of course.
Garmin (GRMN): Garmin manufactures global positioning system devices and a develops GPS software geared toward the aviation, automotive, boating, and outdoor recreational markets. With a global reach, the company sells through a network of dealers and distributors in 100 countries and also sells directly to original-equipment manufacturers. While GRMN did fit our screen, we believe that standalone GPS device manufacturers do not possess any durable competitive advantage over smart phones, which makes it unlikely that even if Buffett did dive in tech, he’d pick up shares of Garmin.
Microsoft (MSFT): Of all the companies in today’s list, given Buffett’s close relationship with Bill Gates, Microsoft is the most likely candidate to be added to the Berkshire profile, in our opinion. MSFT has an excellent record of producing solid returns on invested capital, yields 2.24%, and continues to throw off a tremendous amount of cash (more than $1 billion in cash flow per month) and remains very profitable, with operating margins in the mid-30% range. Though the company has dominated the software world for much of the past 20 years, the new era of cloud computing threatens the firms competitive advantages around the Office and Windows franchises. However, because of its strong balance sheet and operating history, we believe it’s likely that Windows Azure will help the firm transition from a software giant to a cloud computing powerhouse of rivaling stature.
Harris Corporation (HRS): Harris sells communications products and services to government and commercial customers in more than 150 countries. The company pays a 2.16% dividend yield, has a $5.95 billion dollar market cap, has strong returns on equity (29.47%), and on a valuation basis, the firm trades on a P/E of just 9. While the company does have some strong competitive advantages, namely that it possesses the only Joint Tactical Radio System-certified tactic radio, the majority (80%) of the firm’s revenue comes from government sales. In an budget conscious political environment, any shift in military spending could significantly affect HRS’s bottom line. We believe this political risk makes it unlikely Buffett would consider picking up shares.