Buffett Doubles Down on Big Blue

By Andrew TonnerFool.com

Source: IBM

If there was ever an investor whose behavior retail investors would do well to mimic, Berkshire Hathaway CEO Warren Buffett is as good a bet as any. Buffet more or less has followed the same playbook over the course of his legendary career; therefore, it strikes me as odd lately that investors, retail and professional alike, continually shun Buffett's most sizable stock pick of the past several years --International Business Machines .

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In yet another example that the octogenarian's legendary patience and long-term time horizon remain fully intact, Buffett again bucked the trend by adding to his IBM position in the third quarter. Is it time for you to take notice?

Buffett buys (more) Big Blue According to the flurry of 13F filings recently made public by the SEC, Berkshire increased its holdings of IBM's shares by roughly 2% during the third quarter, extending the steady increase in his stake that Buffett and Berkshire Hathaway shareholders have enjoyed since the IBM stake was publicly disclosed in 2011.

At the time of its initial disclosure four years ago, Berkshire Hathaway owned an impressive 5.5% of IBM's total shares outstanding, which translated to an ownership stake worth $10.7 billion at the time. However, plenty has changed between then and now, for better and worse. IBM's shares have struggled to maintain value as the company gradually executes its long-overdue pivot into its cloud-era business model. However, as IBM's business has faced pressure in the interim, so has its stock price.

IBM data by YCharts.

Undeterred, Buffett has increased Berkshire Hathaway's holdings in IBM, consistently buying the stock in the years sincethat first investment. Between Buffett's ongoing buying, and IBM's aggressive share repurchases in recent years, Berkshire Hathaway now owns an even more impressive 8.3% stake in IBM. So why does Buffett keep buying when few others will?

Going against the grain Buffett is legendary for his long-term approach to investing, and far more often than not, he has been vindicated for his patience. Given IBM's continued share-price decline, a recent scan of IBM's stock tearsheet also piqued my interest.

The key?

To me, and presumably Buffett, as well, there's a readily identifiable disconnect with IBM's very gradually declining core business and the huge discount the market has placed on the company's future outlook. For context, IBM stock currently trades at a remarkably low 9.5x its LTM earnings, and yields 3.9%. Wall Street analysts expect IBM's revenue to continue to fall into next year, but believe that Big Blue will actually return to EPS growth in 2016. That reversal alone could be enough to inject some much-needed optimism into IBM shares, even as its broader business realignment requires more time to fully materialize.

Better still, as we saw with Buffett's stake, investors willing to take part in that turnaround get paid to wait in a few ways. Because IBM is a buyback machine, and especially considering its depressed share price, it's a fairly safe bet the company will be very active in repurchasing its shares while its stock price remains low.

Furthermore, IBM's 3.9% dividend is almost double that of the S&P 500's 2% yield. And as a final cherry to this "paid to wait" idea, IBM has grown its dividend at an average annual rate of 15% during the last five years. Although history is never a perfect predictor of future performance, it doesn't take long for a 3.9% yield to get big quickly growing at 15% annually.

If you want to pick stocks that outperform, it typically requires departing from the herd. In the case of IBM and Buffett's activity with the stock, however, it's interesting that fewer people don't see the hallmark elements of what made Buffett such a successful investor with this stock pick. While I still want to get a better sense of the unit economics of IBM's cloud and big-data products, I believe that tech investors enjoy an attractive risk-reward scenario in IBM's stock today.

The article Buffett Doubles Down on Big Blue originally appeared on Fool.com.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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