When Warren Buffett bites off a big piece of a technology name for the Berkshire Hathaway (NYSE:BRK.A) portfolio, then clearly times are changing. (To know more about Warren Buffet, read Warren Buffet: How He Does It.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

For decades, the world's most legendary investor has avoided technology stocks, saying they're too unpredictable. That's what makes last quarter's decision to buy a big chunk of International Business Machines (NYSE:IBM) such an interesting one - it's so unlike him. All told, the investment fund bought $10.7 billion, or 5%, worth of Big Blue.

Were it just IBM, investors could likely chalk it up to an unusual situation that only Buffett saw. It wasn't just IBM though. The fund added other technology picks like General Dynamics (NYSE:GD), Intel Corporation (Nasdaq:INTC), and DirecTV (Nasdaq:DTV) during the third quarter of 2011. Granted, it wasn't the same-sized position as IBM's was, but they were technology stock additions nonetheless, and something new for Mr. Buffett.

Value investing fans everywhere, somewhat shell-shocked, are asking the same question ... why? The answer to the question isn't as odd as one might imagine though. (For additional reading, check out The Value Investor's Handbook.)

The "New" Technology Sector
Have you taken a good, close look at IBM lately? As Mr. Buffett pointed out in his post-release comments, IBM is still a technology company, but it's not predominantly a hardware company any more. More than anything, it's a services company, which for tech names can often mean reliable, recurring revenue.

Just to illustrate the power of recurring revenue, IBM has increased earnings every year since 2003, and every quarter (on a year-over-year basis) since 2004, sailing through the 2008 recession as if it never happened. And, though a forward-looking P/E around 12.7 isn't rock-bottom bargain pricing for IBM shares, it's certainly not your typical tech valuation for a consistently profitable name.

With the exception of Intel, the other technology stocks Warren Buffett picked up in bulk for Berkshire last quarter operate with the same strategy. Though DirecTV is a revolving door of coming and going subscribers, the business is built on the regular collection of monthly subscription fees from the customers it has that month (retention is as big of a challenge as acquisition).

General Dynamics - as a government contractor - doesn't pull in the exact same revenue each and every quarter, but it keeps a steady stream of contracts going at all times, and wins new ones in the meantime. Its earnings, and earnings growth, have been surprisingly consistent since 2003 as well, with only a small hit in 2007 and 2009, and then the move to record earnings anyway in 2011.

So how does Intel fit into that mold? It doesn't, at least not on the recurring revenue front. With the stock trading at only 9.9 times 2012's anticipated earnings, though, the "value" argument still holds up.

The Bottom Line
There's been some speculation that these picks are less Buffett's and more Todd Combs' - Berkshire's newest manager. And, that may well be the case. However, it wouldn't be impossible to believe that Buffett could have pulled the trigger on these trades. They're tech names to be sure, but they're the staples of the technology sector, which is something that has always appealed to Buffett.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, James Brumley did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center