Leucadia

Leucadia National (LUK) is a dog’s breakfast of wildly different businesses under one umbrella headed by two extremely talented investors. The nearest analogy is a very volatile Buffett and Berkshire Hathaway. Leucadia has generated 18.5% annual returns in book value since 1978. Buffett has generated 20.2% annual returns in book value since 1965. The big difference is that Buffett has tended to buy (and pay up for) steady cash-flow generators and thus has more/better opportunities to buy in a downturn. The downside is that those steady cash-flow generators make Berkshire a much less volatile and “safer” stock (beta – 0.73). Leucadia is much more deep value-oriented – but relies for cash on selling assets. So it tends to have more cash in years when it is often tougher to find bargains to buy. That said, it now owns businesses that are much more levered to growth and so is a high-beta stock (1.55 – twice as volatile as Berkshire). My idea is that this is a stock to watch and wait for – and buy as a one-stop SP500 proxy when the market bottoms/panics.

Current businesses — Owns large stakes in an Australian iron ore miner (Fortescue), a Canadian/Spanish copper producer (Inmet), a subprime auto financier (Americredit), and a boutique investment bank (Jeffries). An Idaho lumber company. A niche plastic netting mfr. Gas drilling equipment. A coal gasification plant. An LNG terminal. Wineries/vineyards in OR/WA/CA. A prepaid phonecard company. A vacation home rental mngmt company. A Biloxi hotel/casino. A biotech company. Misc debt-free land. A 50/50 JV (with Buffett) of the largest non-bank owned commercial mortgage servicer (not lender). Auto dealerships. What a mish-mash. The only unifying theme is that the stakes were purchased at what were very low (though not necessarily historically low) prices and are thus on Leucadia’s books at those prices (or market price for their investment stakes). The collection is currently selling for 1.2x book – which isn’t cheap but isn’t particularly expensive either. Berkshire is currently selling at 1.3 book. The only “individual company” risk that i see here is a)a series of small debt payments that will come due from 2012-2014 where another global credit shock could freeze the non-sovereign bond markets and b)the hit-by-a-bus risk because the two key people here are in their late 60’s.

Shareowners – Market cap is about $5 billion. Insiders own about 10% and the two key insiders are in their late 60’s and are gradually selling their stakes (and not likely to buy because of their age). They aren’t however retiring yet. Outside owners tend to be either index funds and/or solid value low-turnover investors themselves. Succession plan is a bit of an issue but this really is a shareholder friendly company and they have said that if they can’t find a replacement to keep the investing going, then they will find one who will manage the dissolution of the investments/pieces. And there are enough disparate pieces here so that that could be accomplished over time with a good return to shareholders.

Strategy: This is truly an investment company and not a “conglomerate”. Assets are bought and sold regularly and there are no internal notions about synergy or somesuch nonsense. So each one of those potential transactions is a catalyst for share price appreciation. Many of the assets are highly levered to growth — and thus will really reflect the market’s own investment/emotional/M&A volatility. Some of the assets are steady and will perform OK (eg the debt servicing business in the US) even in a near worst-case scenario for the economy. Some are potential value-traps. But overall, this is a management team that understands that and has actually prepared for a near worst-case contingency. So the stock really does make for a good one-stop proxy for the overall market. Buy (average in) when the overall markets are totally panicked — and at least you can get instant sector diversification (and thus invest a larger amount than you normally would in a single stock) without the SP500’s (or other ETF’s) problem that that index plows money into a whole bunch of garbage simply because they exist and are big – and without a lot of the specific risk that most other companies face. And since LUK is in the SP500, it will automatically get/lose some small portion of those index assets anyway. What I do find interesting is that LUK has not performed very well over the last year’s bounce. Indicating to me (in hindsight), that this rally was not the start of a bull market but was just a long headfake in a secular bear market. Going forward, each new decline will price in a bit more realism – and each new rally will serve to separate the wheat from the chaff.

To summarize. Watch for now. Wait until there is blood in the streets and markets are oversold and pricing in a bit of armageddon or double-dip or Great Depression or whatever the codewords will be. And look for LUK. Might get lucky. Ugggh.

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