Berkshire's $40 Billion Opportunity

According to Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) latest quarterly report, the insurance division alone has amassed $40 billion in cash and equivalents! Yes, that's "billion," with a "b." With one of the world's greatest investors in control of that stockpile, patiently waiting for the right time to pull the trigger, that $40 billion could produce a nice pop indeed for Berkshire's stock. But first, Warren Buffett needs a shot at a few fat pitches.

Moving the needle
As Berkshire's capital base grows ever larger, the pool of investments that Buffett can explore grows smaller. Assuming that Buffett wants to buy at least $1 billion worth of a company's stock, and can only buy 10% of a company without risking an artificial alteration to its share price, he'd primarily be interested in companies worth no less than $10 billion. According to Yahoo's stock screener, there are only 523 companies with a market cap greater than $10 billion, and just more than 2,000 companies with a market cap exceeding $1 billion.

There are currently a ton of very large companies that fit the Buffett mold, and with the stock market's recent volatility, some of them may offer good values. Furthermore, if the stock market tanks and drags shares of these companies down, it's possible that Buffett could easily put a large portion of his $40 billion cash hoard to work. Here are some of the candidates I think could find their way into Buffett's portfolio.

The nibbles
Berkshire has already nibbled on several companies, taking small positions relative to their total size. If they present a better price, I believe Buffett might back the truck up. As of its latest 13-F filing, Berkshire owned $1.8 billion worth of Anheuser-Busch (NYSE: BUD  ) , $297 million worth of General Electric (NYSE: GE  ) , $164 million worth of Home Depot (NYSE: HD  ) , and $1.2 billion worth of US Bancorp (NYSE: USB  ) .

These are all titans of their industries, with extremely wide moats and very large market caps. Plus, none of these companies trades at more than 19 times trailing net income. If any of those companies' share prices sank 25%-40%, Buffett might be able to put billions to work at bargain prices. However, his success would depend on whether each company's established moat helped it keep growing.

The longshots
In addition, I can see a handful of other companies joining the Berkshire portfolio, if all the stars aligned. Desperate times call for desperate measures, and in the mortgage lending world, times are desperate indeed.

When the hedge fund Long Term Capital Management imploded, Buffett was on vacation. Although he was interested in buying LTCM's positions, he wasn't able to get the deal done. He later joked that his vacation cost him $3 billion in potential profits.

However, the current subprime debacle might be a second chance to put Buffett's billions to work bailing out big financial-services institutions in dire need of liquidity. Perhaps the recent happenings at either Bear Stearns or Countrywide (NYSE: CFC  ) might invite liquidity infusions.  

It may be a long shot, but I don't think a Berkshire investment in either of these firms -- perhaps in the form of convertible preferred stock -- is as far-fetched as it sounds. Both companies' market caps occupy the $10 billion-$15 billion range; both are run by very well-respected and time-tested management teams; and both have long histories of superior returns on capital.

In addition, Buffett once provided capital to Salomon Brothers via convertible preferred stock partly based on his positive feelings towards then-CEO John Gutfreund. (The company was later sold to Travelers, which became Citigroup (NYSE: C  ) .) Although that investment didn't work out quite as planned, Berkshire ultimately realized a reasonable rate of return. Buffett and Bear Stearns CEO Jimmy Cayne are good friends, which may provide some parallels to the Salomon Brothers situation.

This is only speculation -- who knows what Buffett's thinking? Still, with Berkshire's $40 billion cash hoard amounting to almost a quarter of the company's market cap, shareholders should be well-rewarded if Buffett puts that cash to work at anywhere close to his historical rate of return.

Take a swing at further Foolishness:

Berkshire Hathaway has been recommended in both ourMotley Fool Inside Value and our Stock Advisor services. Anheuser-Busch and Home Depot are alsoInside Value picks, while US Bancorp is an Income Investor pick. You can check out either service absolutely free for 30 days.  

Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool's disclosure policy is known for its knuckleball.


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