What Does Buffett See in IBM?

As far as stock market performance is concerned, this past year has been excellent for tech companies. The NASDAQ has returned over 16% in 2014, and a number of different tech businesses have watched their shares skyrocket. IBM, on the other hand, has been an exception.

From year to date, the stock is down roughly 10% and has been trading in the $160 level range for about four months. The only good news concerning the company recently has been that the Chairman and CEO of Berkshire Hathaway, Warren Buffett, is continuing to add to his stake in the business.

Bernstein Senior analyst Toni Sacconaghi, this Thursday on CNBC, discussed whether the company is going to make a turnaround and provided his insights on why he feels Buffett increased his stake.

Turnaround at IBM

“It’s a long road back,” said Sacconaghi. “Many technology companies today, old-line technology companies, are facing this transition between old technologies and new technologies. The world is moving to cloud; the world is moving to big data, and that presents a challenge for all the on-paper [sic.] companies.”

The CEO at IBM

When questioned as to whether the CEO at IBM is a great fit for the company, Sacconaghi says, “I believe that Ginni [Ginni Rometty] is a good leader, and I think she has positioned the company well.

“But we are talking about an elephant here; we are talking about a company that has over 400,000 people that has traditional businesses in mainframe and high-end computing,” replied the analyst.

What Does Warren Buffett See in IBM That No One Else Does?

“I think if you are Warren Buffett, you say, ‘I like companies that produce a lot of cash, that have high returns on equity and I like companies that ultimately deploy that cash sensibly, buyback stock, don’t do crazy acquisitions and have a lot of recurring revenues and profit.’ IBM fits all those criteria.”

Sacconaghi continued, “So, if you are Buffett and you say, ‘I don’t like technology. I don’t understand it. Let me find a company that has characteristics of insurance, characteristics of companies that I like.’

“IBM in tech is about as close as you can get.”