Warren Buffett doesn't need anyone to tell him what to do. But with Berkshire Hathaway'S (NYSE: BRK.A) (NYSE: BRK.B) With its cash holdings now approaching $277 billion, it's hard not to speculate about what the legendary investor might do with so much money.
If I were managing Berkshire's investment portfolio, I know what I'd do with some of that enormous treasure chest. Here are two perfect companies Buffett could buy next.
An obvious choice
I wouldn't be surprised at all if Buffett is already seriously considering selling Berkshire's stake in Fatty (NYSE: CB)A complete takeover of the insurance company would make sense in my opinion.
Buffett began buying up shares of Chubb last year. At the time, however, outsiders knew only that Berkshire was investing in a mystery stock. After months of buying, Berkshire now owns a 6.4% stake in Chubb, worth nearly $7 billion.
Chubb is such a good fit for Berkshire that it’s a wonder Buffett didn’t buy it in the past. The company sells property and casualty insurance, personal accident insurance, supplemental health insurance and life insurance in 54 countries and territories. It also offers reinsurance.
Berkshire’s insurance operations already include GEICO (which primarily sells auto, home and life insurance), Guard (which primarily offers commercial and excess and surplus insurance) and General Re (a top reinsurer). Chubb’s products largely complement Berkshire’s insurance offerings.
Chubb is financially strong. It is consistently profitable. And its shares are attractively valued, with a forward price-to-earnings ratio of about 12.5.
Another candidate who remains under the radar
I think Chubb could be Buffett's next “whale.” However, I think another company would be a great “guppy” for him to add to Berkshire's long list of subsidiaries.
Kinsale Capital Group (NYSE: KNSL) focuses on a niche market: excess and surplus (E&S) insurance for small businesses. Sure, Berkshire is already active in the E&S market. But acquiring Kinsale would give it the crème de la crème in my opinion.
The average combined ratio between 2021 and 2023 among the top specialty insurers was 92.8%. Kinsale’s combined ratio during this period was 77.2%. Why is Kinsale so much more profitable than its peers? Two factors in particular stand out.
First, the company’s underwriting process is top-notch. Unlike many of its rivals, Kinsale doesn’t delegate underwriting to agents, brokers, or other third parties. Second, the company’s technology platform increases its operational efficiency.
Admittedly, Buffett may be a little wary of Kinsale's valuation, with shares trading above 31 times forward earnings. However, Berkshire's portfolio contains even more expensive stocks (I'm looking at you, No And Snowflake.)
I think Kinsale deserves a premium valuation. The stock's compound annual growth rate of 51% between 2016 and 2023 is nearly four times greater than the earnings for the S&P 500 over the period. So far in 2024, Kinsale has more than tripled the S&P's returns.
There is still enough money left
Berkshire Hathaway could easily buy Chubb and Kinsale. Chubb’s market cap hovers around $108 billion, while Kinsale’s is under $11 billion. Buffett could acquire both insurers and still have more than $150 billion in cash, even if he paid a lot more than they’re worth now.
Will Buffett use some of Berkshire’s massive cash hoard to buy some or all of these businesses? I don’t know. Even if he doesn’t, Chubb and Kinsale are both great choices for long-term investors who don’t have as much cash as Buffett.
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Keith Speights has positions in Berkshire Hathaway and Chubb. The Motley Fool has positions in and recommends Berkshire Hathaway, Kinsale Capital Group and Snowflake. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
Warren Buffett Has Built Berkshire Hathaway's Cash Stockpile to $277 Billion. Here Are 2 Perfect Companies for Him to Buy Next was originally published by The Motley Fool
