While the world is following the European debt-crisis, and the change of Greek prime ministers, the world’s most successful investor, Warren Buffett, Chairman and CEO of Berkshire Hathaway (NYSE: BRK-A) just revealed that he has purchased US$10.5 billion of IBM (NYSE: IBM) shares.
With this purchase, Warren Buffet now owns 5.5% of the shares in IBM. This is Berkshire portfolio’s second-largest in terms of market value. It is also Buffett’s first major move into technology.
How is this purchase in line with Buffett’s overall strategy?
“I don’t know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM,” said Warren Buffett.
Robert Hagstrom, manager of mutual-fund Legg Mason Growth Trust LMGTX and author of “The Warren Buffett Way” shared “The most important attribute about the IBM purchase that I find consistent is its methodical capital allocation,” IBM, he noted, “continually reduces share count, it methodically allocates cash to the dividend, and has laid out clearly a roadmap for more capital deployment.”
So how does Buffett make his picks? What is “Warren’s Way?”
In his public remarks and annual letters to Berkshire shareholders, Buffett says he buys stocks that are “available at a sensible price.”
The following tips are the five specific investment criteria Buffett check to find value:
•Free cash flow net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million.
•Net profit margin of 15% or more.
•Return on equity of at least 15% for each of the past three years and the most recent quarter.
•A dollar’s worth of retained earnings creating at least a dollar’s worth of shareholder value over the past five years.
•Ample liquidity. Only stocks with a market capitalization of at least $500 million are included.