Why Warren Buffett Could Buy These 6 Tech Stocks

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 |  Includes: ADI, ERIC, GLW, SIEGY, TEL, TRI
by: Investment Underground

By H.D. Carver

The other day, my colleagues challenged me to find technology stocks the “Oracle of Omaha” might add to the Berkshire Hathaway, Inc. (NYSE:BRK.A) portfolio. Any Buffett groupie will tell you, “Warren Buffett doesn’t buy tech stock.” Ever the contrarians, we called it well in advance last Spring. That bridge was crossed, however, when Berkshire Hathaway bought Intel Corporation (NASDAQ:INTC). Others would argue he crossed it with International Business Machines Corp. (NYSE:IBM). Either way, it has been crossed, so the question remains; what’s on the other side that will catch Warren’s eye?

I ran a screen for technology stocks through FINVIZ.com using traditional ‘value stock’ indicators. I screened for U.S. stocks only. Warren doesn’t buy much outside the United States if you’ve noticed. The group was clearly too small to work with, so I opened up the parameters to include foreign companies. Now we’ll look at my top 6 and see if I can persuade you, and Warren, of their merits.

Analog Devices, Inc. (NASDAQ:ADI), is a large cap ($10.51 billion) in the semiconductor-integrated circuits industry. It is trading at about $35.26. ADI has the traits Buffett appreciates. The table below shows average values for key fundamentals. These were derived from 32 of Berkshire Hathaway’s current holdings and serve as a reference point for this analysis.

P/E

PEG

P/B

ROA

ROE

Current Ratio

Dividend Yield

Pay Out Ratio

15.43

1.92

2.94

8.15

15.35

1.19

2.02

28.79

Click to enlarge

ADI has a price/earnings ratio of 12.54, a price/earnings growth ratio of 1.82 and a price to book of 2.76. These fundamentals certainly point to a value stock and are key characteristics inherent in almost all Buffett investments. Analog’s return on assets and return on equity are strong compared with the averages. ADI’s current ratio is extremely high and as you might suspect, indicative of substantial CCE. Even Analog’s dividend yield is robust at 2.80, another typical trait displayed by the Buffett portfolio. The payout ratio is a slightly higher than average, but no worries! One more point. ADI was founded in 1965. Now I mention that only because Buffett seems to have an acute predisposition for companies long in the tooth.

LM Ericsson Telephone Co (NASDAQ:ERIC) is a $32.74 billion telephone equipment company that is trading at about $ 10.21. Its price/earnings ratio is below the threshold at 14.50, as is the price/earnings growth ratio of 1.08. ERIC’s price to book of 1.60 is also stellar. Reporting slightly weaker than average, are return on assets and return on equity, which are 6.33 and 10.94 respectively. The current ratio is beyond adequate at 1.93. The dividend yield is beyond acceptable at 3.30. A payout ratio of 50.00 is higher than average but Berkshire has several companies in its portfolio that have payout ratios higher than 50.00. Acknowledging Warren’s deference to the more established companies, this one was founded in 1876.

Corning Inc. (NYSE:GLW) is a large cap in the diversified electronics industry, trading at about $13.3. The price/earnings ratio is an incredibly low 6.24 with a correspondingly low price/earnings growth ratio of 6.24 and a fractional price to book of 0.67. Corning’s return on assets is on the feeble side, but return on equity is right in line. GLW’s current ratio is beyond robust at 4.61. The dividend ratio is 1.70 and the payout ratio of 9.00 makes one optimistic that the yield could improve. I’m delighted to mention the fact that Corning was founded in 1851.

Siemens AG (SI), is a large cap ($87.35 billion) trading at about $99.91. This giant in the telecom services industry has a price/earnings ratio of 10.72, a price/earnings growth ratio of 0.28 and a price to book of 2.06. Siemens' return on assets is wispy at 4.80 but return on equity is within tolerance. The current ratio of 1.21 suggests financial health. The dividend yield is a soothing 3.70 with a reasonable 29.00 payout ratio. The company was founded in 1847 and thus meets the longevity test I have previously mentioned.

Next up is TE Connectivity Ltd. (NYSE:TEL), which most of us knew as Tyco Electronics Ltd. until changing its name in March of this year. Priced at about $31.42 per share, this large cap in the diversified electronics industry has a price/earnings ratio of 11.17, a price/earnings growth ratio of 0.86 and a price to book of 1.77. TLE’s return on assets is 7.02 and return on equity is 17.24. The current ratio of 1.95 speaks to the company’s financial well-being. The dividend yield of 2.20 and payout ratio of 19.00 mirror the expectations of a Buffett investment. As companies in this sector go, TLE has some whiskers with a founding date in 1960.

Last in my analysis is Thomson Reuters Corporation (NYSE:TRI), a large cap in the information and delivery services industry, trading at about $26.34. TRI’s price/earnings ratio is a tad high at 15.77 but price/earnings growth is very good at 0.98. Price to book for Thomson’s is almost one for one (1.15). Both return on assets and return on equity are disappointing at 3.95 and 7.36 respectively. Current ratio disappoints also at 0.84. The dividend yield of 4.60 and payout ratio of 87.00 combine to suggest that dividend payments are under extreme pressure. There are explanations for this trend and a possible solution in the person of newly appointed chief executive officer James Smith, who succeeds Tom Glocer as CEO, effective January 1st, 2012. I believe Thomson’s efforts to increase the quality of its journalistic talent will pay off. I think Warren would also respect the direction TRI has taken to enhance the quality of its product. Thomson’s, founded circa 1950 and Reuter’s circa the dawn of civilization combine to make Thomson Reuters Corporation a qualifier in terms of longevity.

In closing, I leave you the table below, which details the averages of the stock we analyzed here today.

P/E

PEG

P/B

ROA

ROE

Current Ratio

Dividend Yield

Pay Out Ratio

11.82

0.95

1.72

6.72

16.63

3.15

3.05

38.00

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.