Warren Buffett has startled the world by picking up over $10 billion in shares of International Business Machine (IBM) for his company Berkshire Hathaway (BRK.A). This startled Wall Street because Buffett usually does not invest in the tech sector, he does the exact opposite. Buffett believes that the tech sector is very unreliable. The question now is: Should you invest with Buffett?
Buffett started to purchase in the first quarter of 2011, purchasing more than 4.5 million shares for a price of $159 on average. He then quickly began to purchase more in the second and third quarter, when he collectively bought more than 80 million shares for $170. From the fourth quarter of 2011, to the third quarter of 2012, he made smaller purchases at average prices ranging from $190.
By the end of the third quarter, he owned a total of more than 65 million shares, which equals 5.98% of IBM's shares outstanding. It also made the company weigh more than 18% in Buffett's portfolio.
Buffett is banking on the fact that IBM will do well in its coming days. Not just in innovation but financially as well. He believes that the tech company's EPS will skyrocket, hitting new highs. He believes this because IBM said that it had transferred its main areas of business to those with with higher profitability and margins. IBM stated that most of its revenue comes from selling software and financial services, which is a very good indicator for future growth, the tech giant also stated that these changes have led to growth in EPS for the last nine years. The financial guru also said that now is a great time to invest in American companies because of their current profitability as well as their prospective potential. The forthcoming potential is what Buffett is banking on; his investment relies solely on IBM's future. In fact, Buffett stated that he wished IBM's share price would fall so he could rack up some more shares. Buffett also believes in IBM's past CEOs, Lou Gerstner and Sam Palmisano, and praised then for bringing back IBM from when they were on the edge of bankruptcy 20 years ago.
With all of this being said, is IBM really worth your time and money? IBM may be a bunch of things, but it is not a bad investment. With its good track record, and 100 year experience, it will not fail you. Over the past nine years IBM has demonstrated extraordinary returns for individuals, and has had an inconceivable price. IBM predicts that they are on a path to reach over $20/share in EPS, "We are well on track toward our long-term roadmap for operating earnings per share of at least $20 in 2015." If all goes according to plan then IBM would give the investor an average gain of over 100%, which would double your investment.
IBM should be a wonderful stock pick for a bunch of reasons, the consensus rating, as well as the analyst ratings. The consensus rating for the giant is a moderate buy, this is actually well above average, the averages for other companies in its sector are hold. The reason for this is because of strong earnings, and future potential. Analysts also view this company as a very good future investment primarily because of its EPS estimates. You should consider investing in IBM for these reasons too.
In The End
IBM is working to achieve a goal of $20/share, which is hard but possible. IBM can achieve this through its predictable software gain. So, just remember when you are looking into to other companies, not that many companies have the growth and rate of return that IBM has to offer.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IBM over the next 72 hours.