What Warren Buffett Wants From Tech Stocks

Even well into his 90s, Warren Buffett still commands the respect of the investing community. Many investors watch the Berkshire Hathaway (BRK.A 0.99%) (BRK.B 1.08%) leader’s every move when it comes to stock market decisions, and Buffett is never shy about making aggressive moves when it suits him.

The most recent disclosures from Berkshire regarding its stock portfolio included a new position in a tech stock, Taiwan Semiconductor Manufacturing (TSM 0.97%). Over the years, Buffett has at times expressed a reluctance to invest in tech stocks, considering the industry to be outside his circle of maximum competence as an investor.

Nevertheless, Taiwan Semi isn’t the first tech stock to make Berkshire’s portfolio, and it’s clear from his past choices that there are certain attributes Buffett seeks out in adding technology-focused companies to the list. Those same things can help you when you’re looking to invest in unfamiliar waters, whether it’s in technology or other types of stocks.

1.Industry leadership

Buffett has typically chosen tech stocks that have already become leaders in their respective industries. The most obvious example is Apple (AAPL 0.38%), which remains the dominant company in electronic devices of many different sorts. From iPhones and Apple Watches to Mac computers and various tablets, Apple is a favorite among its customers and always has people watching for its latest product releases.

This trait is evident in other companies in the Berkshire portfolio. HP (HPQ 0.17%) has long been the industry leader in computer printers, while Activision Blizzard (ATVI 0.39%) is one of a handful of top players in the video game industry.

Taiwan Semi meets that bill as well, with a commanding market share over 50% in the semiconductor foundry market. The vast majority of cutting-edge chips get made by Taiwan Semi, and that trend appears likely to continue as chip designers more frequently turn to the foundry specialist for production rather than making costly provisions to make chips in-house.

2. Good value

Buffett is the quintessential value investor, sticking to his guns even when the style goes out of favor. With a current valuation of around 15 times trailing earnings, Taiwan Semi fits the mold of Buffett-held tech stocks.

Apple’s valuation has expanded dramatically since Buffett’s initial purchases, but when he started his position, the tech leader traded at much lower earnings multiples. Meanwhile, HP also trades at rock-bottom levels by traditional valuation metrics, as investors anticipate a drop in earnings following pandemic-spurred purchases of printers and other equipment. Activision is somewhat of a special case, given its pending potential acquisition by Microsoft (MSFT -0.19%)but that still makes it a value play of spells.

3. Growth leads

Despite looking for value, Buffett also wants companies that have growth potential. Taiwan Semi looks prepared to keep extending its competitive advantages and serving an even wider array of semiconductor clients. Apple has also managed to keep growing with innovative new offerings and updated product lines on existing favorites.

Of course, sometimes Buffett gets things wrong. His past ownership of IBM (IBM 1.06%) hinged on the pioneering computer company’s ability to use its strong brand and financial resources to find new niches for leadership, but IBM largely failed to restore its business to its former glory. That eventually led many to see Buffett’s purchase of Big Blue as a big mistake.

Expanding your horizons

When you consider looking beyond your core area of ​​expertise for investing ideas, it doesn’t hurt to look for these three favorable characteristics. Regardless of whether you’re talking about tech or a completely different sector, looking for an attractive combination of current value and future growth always makes sense, and you’ll often find the most stable and secure businesses among the current leaders of a promising industry .

Dan Caplinger has positions in Apple, Berkshire Hathaway (B shares), and Microsoft. The Motley Fool has positions in and recommends Activision Blizzard, Apple, Berkshire Hathaway (B shares), HP, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.