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Could Berkshire Already Own a Stake in Buffett's Next Deal?

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- By Rupert Hargreaves

I recently looked at the significant position changes in Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) equity portfolio according to its latest 13F filing.

These reports only detail equity positions, so they only provide limited insight into the actions of any investor during the period under review, which is the three months to the end of 2020 in this case. The filings do not provide any insight on credit or cash holdings.

They should also be used as a starting point for further research as 13Fs only tell us what a hedge fund or investment manager owned at one point in time. They do not reveal when the holdings were acquired or why the manager acquired them.

Berkshire's portfolio

Berkshire CEO Warren Buffett (Trades, Portfolio) made a number of large portfolio changes during the quarter.

His portfolio managers, Todd Combs and Ted Weschler, appear to have made several smaller changes as well.

In the past, Buffett has said that any transaction of more than $1 billion has to go through him first. So, we can assume that Combs or Weschler may have initiated any transaction with a value of less than that.

These portfolio managers seem to have increased their position in Kroger Co. (NYSE:KR), one of the world's largest food retailers, during the three months to the end of December.

According to the 13F, Berkshire increased its holding in the stock by 34% to $1.1 billion, making it a 0.4% portfolio weight.

Another significant change was T-Mobile US Inc. (NASDAQ:TMUS). Here the portfolio managers increased their position by 170%, taking the position's value to just over $700 million. That would be a substantial holding for most hedge funds, but not for Berkshire. It was a 0.26% portfolio weight at the end of the quarter.

The managers also marginally increased RH (NYSE:RH) holdings by 1.4%. This position has a total value of just under $800 million.

A holding in Marsh & McLennan (NYSE:MMC) was boosted by 27% to just under $500 million. I'm particularly interested in this business because it operates in a sector where Berkshire has a tremendous amount of influence and experience.

Marsh & McLennan

The group is a professional services company with businesses in insurance brokerage, risk management, reinsurance services, talent management, investment advisory and management consulting. This suggests it's the sort of company Berkshire could be interested in either working with or acquiring at some point. The chances are, the insurance giant is already working with Marsh.

With a market capitalization of nearly $60 billion at the time of writing, the professional services company would be a significant deal for Berkshire. I'm not saying it will happen. I just think it's interesting to see the similarities between the two companies.

Marsh is currently trading at a forward earnings multiple of 22, and Wall Street is forecasting earnings growth of 35% this year. This multiple might seem expensive at first, but the company is highly cash generative. It generated a free cash flow per share of $5.19 for the 2020 financial year. That would put the stock on a price to free cash flow ratio of just over five.

These are the sort of qualities Buffett is always looking for in a potential acquisition. He wants to buy companies with a strong franchise and solid reputation. He also usually looks for companies that he knows and understands well, in sectors he has some insight into. Cash generation is another quality the Oracle of Omaha is always on the lookout for.

Marsh ticks all of these boxes. If he could get a better price for the business, Buffett might be interested. At the last count, Berkshire certainly had enough cash to pull the trigger.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.