Tech Stocks for the Tech-Averse Warren Buffett

Includes: BDX, FDS, GRMN, INFY
by: John P. Reese

Throughout his incredibly successful investing career, Warren Buffett has made money investing in a number of different types of companies. He's found big winners in consumer products firms like Coca-Cola (NYSE:KO), financials like American Express (NYSE:AXP), food-related companies such as Dairy Queen, insurers like GEICO and many others.

One area into which Buffett rarely delves, however, is technology. But as Robert Hagstrom noted in his 2002 book The Essential Buffett: Timeless Principles for the New Economy, Buffett's reluctance to invest in tech firms, "is not a statement that technology stocks are unanalyzable." In fact, while it's often said that Buffett shies away from tech firms because he doesn't understand them, Hagstrom says that is not true. At Berkshire's 2000 annual meeting, he says, Buffett said that, "it is not that we don't understand a technology business or its product. The reason we don't invest is because we can't understand the predictability of the economics ten years hence."

There's certainly some wisdom in that; by nature, the technology sector will always be more prone to game-changing surprises than most other sectors. But as we move into 2010, a number of areas of the tech market involve products or services that have become entrenched in the daily lives of individuals and businesses -- not trendy, here-today-gone-tomorrow items, but items around which industries have been built and in which extensive infrastructure investments have been made. Studies, for example, show that more than 75% of Americans own a personal computer, while about two-thirds of U.S. homes have broadband Internet service, and almost a third of North American adults own some sort of GPS navigation system.

Some of Buffett's recent picks have reflected the intertwining of the technology world and today's business world. In 2009, Buffett's Berkshire Hathaway picked up shares of Becton, Dickinson and Company (NYSE:BDX) -- not long after my Buffett-based model targeted the firm, which makes a variety of drug delivery and medical diagnostic technologies. And technology is also a big part of Chinese electric carmaker BYD, in which a Berkshire subsidiary has invested almost a quarter-billion dollars.

Because our society has become so reliant on technology, I allow my Buffett-based Guru Strategy computer model to roam the tech sector to find investment ideas. My model -- based on the book Buffettology, written by Buffett's former daughter-in-law and colleague Mary Buffett -- dives deeper into a company's history than any of my guru-based strategies, looking for companies with decade-long track records of success.

Not many technology firms boast such lengthy track records, so when a tech stock does catch my Buffett model's eye, I take notice -- and currently the approach is keen on a few such stocks. Here's a look at how these firms have been able to put together the long-term results and balance sheets that my Buffett-based approach likes to see, despite being in a sector that can be prone to unexpected developments.

Garmin Ltd. (NASDAQ:GRMN): Garmin is up more than 70% since the 10-stock Buffett-based portfolio I track on picked it up last March, and the stock still gets a perfect 100% score from my Buffett-based model. A big reason is its decade-long history of strong earnings growth. The $6.9 billion market cap firm, whose international headquarters are located in Kansas, has upped earnings per share in 8 of the past 10 years, growing EPS at a 34.5% rate over that period.

Buffett has been known to target conservatively financed companies, and the model I base on his approach looks for firms that have enough annual earnings that they could, if need be, pay off all long-term debt in less than five years. Garmin doesn't need five years; it doesn't even need five minutes. The company has no long-term debt, a great sign.

Another reason the Buffett-based approach likes Garmin is that the company has averaged a 28.5% return on equity over the past ten years, almost double the model's 15% target. That's a sign of both the strong management and "durable competitive advantage" Buffett is known to look for.

Infosys Technologies (NASDAQ:INFY): Based in India, this $32 billion market cap IT firm gained more than 55% while in my Buffett-based portfolio from mid-July to late December of last year. It still gets very high marks from my Buffett model, thanks in part to its having upped EPS in each year of the past decade. The firm also has no long-term debt, and has averaged a 32.6% return on equity over the past ten years.

In addition, Infosys has generated a 29.8% return on retained earnings over the past decade. (This is derived by taking the $2.13 its EPS have increased in the past 10 years and dividing it by the amount of earnings it has retained -- i.e., not paid out in dividends -- in that period, $7.15.) That's more than twice this model's 12% target, another sign management is doing a good job with shareholder money.

FactSet Research Systems Inc. (NYSE:FDS): This Connecticut-based provider of global financial and economic data is another technology company with an impeccable earnings history. It has upped EPS in each year of the past decade, growing them from $0.49 to $2.97 in that time.

The $3 billion market cap firm also has no long-term debt, a 10-year average ROE of more than 25%, and $3.05 in free cash flow per share, all of which earn high marks from my Buffett-based model.

Disclosure: I'm long BDX, GRMN, INFY, and FDS.