Start Scaling into Leucadia on Dips

Today is shaping up to be a down market, and it may be a good day to start scaling into Leucadia National Corp. (LUK). Leucadia is an eclectic investment company that is somewhat similar to Berkshire Hathaway (BRK.A), which I posted on a few weeks ago.

LUK was founded in 1854. It engages in manufacturing, telecommunications, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations. It is run by two very talented managers - Ian Cumming and Joseph Steinberg, who have received praise from Warren Buffet.

I recommend reading some of Leucadia's "Letters from Chairman and President" to get a good feel for the company. If you read the latest letter for year 2007, you will see that the book value has grown at a compound rate over 21% a year since the company went public in 1978. The market price has grown 26% compounded which has exceeded the return from Berkshire Hathaway in the same time period.

In my BRKA post, I said that I like to buy it when Price/Book is 1.5 or less. LUK generally sells at a higher Price/Book. I believe its book value is considerably understated. So for LUK, I like to use Price/Book < 2.0 as a rough buy point indicator. The Price/Book ratio is currently 1.84.

LUK has been depressed recently because the company recently made large investments in two financial stocks: 27.5% of Jefferies & Company (JEF) and 25.6% of Americredit (ACF). Since LUK owns over 20% of the stock in these companies, it uses the "fair value" method of accounting, where the stock value is marked to market on the balance sheet.

It is quite possible that LUK will trade lower if the bear market in financials resumes, so I would recommend gradually scaling into LUK stock to build a position. LUK pays a small dividend, but is relatively tax friendly and can be owned in taxable accounts. LUK is a hard stock to buy at a cheap price, so I think it is better to be early and accept some short term weakness.

Full Disclosure: I am long LUK and plan to buy more on price dips.