What could be worse than having a portfolio that dropped 55% during the financial crisis? Being told to diversify, ignoring that advice, and kicking yourself as you see the market crashing. I’m planning a series of articles on proper diversification, but before I get to those, I thought I’d examine a stock that is inherently diversified. This conglomerate is often referred to as a mini-Berkshire Hathaway (BRK.A, BRK.B), and with good reason.
Leucadia National Corporation (LUK) has a 30-year history behind it, and its investment strategy has proven to do well in good times and bad. Much like Berkshire’s strategy of buying well-managed companies and letting them go about their business, Leucadia also mirrors Berkshire in buying companies below their intrinsic value. Here’s just a few of the companies that Leucadia holds. Note the broad diversification across many industries.
- Conwed Plastics
- Idaho Timber
- Keen Energy Services
- Crimson Wine Group
- Leucadia Energy
- Hard Rock Hotel and Casino (Biloxi)
- Sangart (91%)
- Berkadia Commercial Mortgage (50%)
- HomeFed (31.4%)
- Jefferies & Company (29%)
- Inmet Mining (9.98%)
- Fortescue Metals Group (9%)
Some of these are publicly-held corporations, allowing Leucadia the flexibility to quickly increase its liquidity by selling off pieces in the open market. Cash flow is not generally an issue, though. The company generated $300 million of it in the TTM and over half a billion in cash in its MRQ.
The comparisons to Berkshire go even further. Not only is Berkadia a joint venture with Berkshire itself, but Leucadia has extraordinary consistency in its management. Chairman Ian Cumming and President Joseph Steinberg have been with Leucadia for more than 30 years and combined own 8% of the company’s stock, putting their money where their mouths are.
Investors should be aware that Leucadia’s profit and loss statement is not the thing to pay as much attention to as its cash flow statement. The P&L is always important, but you want to see if the individual holdings are pumping out cash. That’s the true measure of a company’s value and, of course, provides Leucadia with cash to make further acquisitions.
Like any great company, Leucadia goes to great lengths to break out the data for each of its businesses and segments. Not only is cash flow something to watch, but by examining revenue at each company, one can make certain that Leucadia’s businesses are performing at the top-line.
How is this actionable?
Leucadia is a buy, and possibly a hold for a very long period of time. In May of 2008, the stock hit an all-time high of $54. Today it’s at $33, a mind-blowing 40% below the high. I like the price here for two reasons. First, where else can you find such a well-run company at such a discount to its high? Second, regardless of the economy performs, I see all of Leucadia’s businesses as being companies that will survive a downturn. They struggled a bit during the financial crisis but overall did just fine.