While Warren Buffett isn’t famous for investing in technology companies, currently Berkshire Hathaway’s (BRK.B) largest holding is Apple (AAPL). That isn’t the only tech stock held by BRK.B. The company also holds shares in Amazon (AMZN), VeriSign (VRSN), and the recent IPO Snowflake (SNOW). Many investors like to follow his lead and invest in companies he purchases, but I prefer to invest in stocks based on his investment philosophy, and I have three that fit the bill.
To do this I use an investment strategy outlined in the book Buffettology, written by Buffett’s ex-daughter-in-law, Mary Buffett. First, I set up a stock screen based on the criteria laid out in the book. This screen looks for stocks that have a 10-year track record of generally increasing EPS, long-term debt not more than five times annual earnings, average ROE over the past ten years of at least 15%, average ROIC over the last ten years of at least 12%, and earnings yield higher than the long-term Treasury yield.
Since tech stocks have been the story of 2020, I added two more filters to the screen that only search for technology companies and stocks rated a “Strong Buy” in our proprietary momentum-based POWR Ratings system. The following three tech stocks are not only “Strong Buys” in the POWR Ratings, but are financially sound and offer robust growth potential: Accenture plc (ACN), Lam Research Corporation (LRCX), and Texas Instruments Inc. (TXN).
Accenture plc (ACN)
ACN is a leading global IT services firm that provides consulting, strategy, and technology and operational services. These services include aiding companies with digital transformation, procurement services, and software system integration.
The company has gained traction in its consulting businesses due to an increased demand for services that can improve operating efficiencies and save costs. Its outsourcing business is also gaining traction as it sees strong demand from clients to assist with the operation and maintenance of digital-related services and cloud enablement.
Strategic acquisitions have also been a key growth driver for the company as it has been able to enhance its cloud and digital marketing suite and broaden its product portfolio. In last year alone, the company invested $1.2 billion on 33 buyouts. ACN has a history of growing EPS, has relatively low long-term debt, and a high return on equity.
The company should continue to see future growth based on its successful transition to higher-growth areas such as digital, security, and cloud. ACN is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, three out of the four components that make up the POWR Ratings. It is also the #1 ranked stock in the Outsourcing – Tech Services industry.
Lam Research Corporation (LRCX)
LRCX manufactures equipment used to fabricate semiconductors. The company is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process. The company reported strong earnings results last month, driven by broad-based secular growth across data transport, analysis, and storage.
More specifically, the company sees an increase in NAND demand related to 5G migration, video, and new game consoles. While LRCX also sees stable foundry orders, it is the improving memory fundamentals for both NAND and DRAM that will drive future growth. Its potential in etch, and its recent adoption for its atomic layer deposition offerings will add to growth.
The company’s transition to the new data-enabled economy and opportunities from China customers bodes well for the future. LRCX has a strong history of growing earnings and has a sky-high (48.1%) return on equity. Its long-term debt is relatively low compared to its cash balance.
LRCX is rated a “Strong Buy” in our POWR Ratings system. In fact, the company has a grade of “A” for every POWR component, including its overall rating. It is also ranked #7 out of 86 stocks in the Semiconductor & Wireless Chip industry.
Texas Instruments Incorporated (TXN)
While many consumers know TXN from its well-known calculators, 95% of its revenue is actually generated from semiconductors. The company is the world’s largest maker of analog chips used to process real-world signals such as sound and power. TXN also has a leading market share in digital signal processors used in wireless communications and microcontrollers used in various electronics applications.
The company reported its latest financial results last month, wherein both earnings and revenue beat expectations. This was driven by growth in personal electronics that are seeing increased demand due to the work-from-home trend. TXN is also seeing a rebound in the automotive segment. Its opportunities in this market should continue as cars are increasingly adding electronic content.
TXN has a bright future ahead of it due to its focus on the Internet of Things (IoT) and 5G customer deployments. The opportunity in IoT is huge for semiconductor companies, as it connects every imaginable electronic device. The company also has a very high return on equity of 59.9% and a healthy balance sheet.
The stock is rated a “Strong Buy” in our POWR Ratings system. It has a grade of “A” for Trade Grade, Buy & Hold Grade, Industry Rank, and a “B” for Peer Grade. It is also the #5 ranked stock in the Semiconductor & Wireless Chip industry.
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BRK.B shares fell $0.23 (-0.10%) in premarket trading Friday. Year-to-date, BRK.B has gained 1.32%, versus a 12.76% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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