Leucadia: A Mini-Berkshire on Sale

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 (NYSE:LUK-OLD) 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.

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.

Disclosure: I am long LUK-OLD.

This article was written by

Author has worked for 20 years as a legitimate communications professional, and published dozens of articles regarding non-issuers on topics including consumer finance, credit insurance, junk science, specialty chemicals, ranch conservationists, biofuel, government budget issues, protecting low-income families from losing dental coverage, and corruption at a Texas water district. His work includes extensive investigation and reporting about fraud at Bally Total Fitness, which became the subject of an SEC complaint and settlement. His investigative work on voter fraud Texas led to the largest investigation of voter fraud in the state, and resulted in both arrests and convictions. He wrote 20 articles warning of Bitcoin investing dangers at CCN.com an InvestorPlace.com. His experience in specialty lending began in 2004. His expertise has been sought by hedge funds and private equity through Gerson Lehman and Coleman Research. He is cited in academic journals, and published in newspaper op-eds. He is an experienced and respected financial journalist, writing over 2,500 articles across multiple online publications including The Motley Fool, InvestorPlace, LearnBonds, Wyatt Research, U.S News & World Report, and Crain’s. His activist position for PR professionals has ruffled regulatory feathers, particularly regarding 17(b). Legislative history says 17(b) is "…particularly designed to meet the evils of the 'tipster sheet' as well as articles in newspapers or periodicals that purport to give an unbiased opinion but which opinions are in reality bought and paid for." H.R. Rep. No. 85, 73d Cong., 1st Sess. 24 (1933).” On 6/6/34, a report to the Senate Committee on Banking and Currency described “pools” as: “…an agreement between several people… to raise the price of a security by concerted activity on the part of the pool members, and thereby enable them to unload their holdings at a profit upon the public attracted by… propaganda [such as] “tipster sheets”. A 1934 Michigan Law Review article notes, “Another part of our picture contributing to the post-prosperity clamor for protection was and is the clearly fraudulent security transaction…The [promotional] activities of George Graham Rice will illustrate…In him the tipster sheet had its first proponent. He operated the Iconoclast which had a circulation of hundreds of thousands.” Of Section 17 the author writes, “…These provisions are designed to cover direct and indirect fraudulent inducements and tipster sheets.” The SEC’s 1936 Annual Report states, “The purposes of the Securities Act of 1933 are to…protect honest enterprise, seeking capital by honest presentation, against the competition afforded by dishonest securities offered to the public through crooked promotion.” Legislative history differentiates tipster sheets from legitimate communications, and those communications were endorsed by the SEC. The SEC’s 1963 Special Study included endorsement of “informal corporate publicity [as] an important supplement to the disclosures required by the securities acts. In order to keep shareholders, the investment community, and the general public continuously informed of corporate developments, it is desirable for issuers to disseminate publicity through the channels of news distribution as well as by other means. This fact has been recognized by the Commission, which has encouraged publicly held corporations to employ publicity and public relations for these purposes.""There has been an increasing tendency... to give publicity through many media concerning corporate affairs which goes beyond the statutory requirements. This practice reflects a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments. This trend should be encouraged…" The 1963 study called for changes in SEC rules to require disclosure of compensation of public relations firms, specifically: “….a statute designed to prevent misuse of channels of publicity…would eliminate the uncertainties and problems surrounding the existing anti-fraud and anti-manipulative provisions of the securities acts and the rules thereunder…and its provisions relating to civil liability could simplify problems of proof under the existing law.” Yet Congress did not pass a law, inferring that it saw no need to mandate additional disclosures by PR firms, and agreed with the SEC regarding the importance of PR firms in providing additional information about a given issuer. >> Congressional intent is inescapable: there is a bright line between legitimate communications and stock promotion, and legitimate communications are to be exempt from enforcement.Despite the SEC’s recommendation to Congress, and a 2005 request from OTC Markets to the SEC to publish rules, the SEC has never provided rules or guidance regarding PR firms, or enforcement of 17(b). In 2017, the OTC Markets stated “The concept of promotion is extremely broad and inherently includes plenty of gray area between legal issuer investor relations and misleading or manipulative promotion”.From 1935 through contemporary internet sweeps , all 17(b) cases fit the same criteria: Respondents who made their living by primarily engaging in stock promotion, and/or were never and had never been employed for legitimate corporate communications; that engaged in pump-and-dumps of worthless and/or fraudulent securities and/or companies, or manipulation schemes in which a principal company owner fails to disclose ownership and induces purchases so he can sell at higher prices; in which published materials (as described by OTC Markets and echoed by the SEC ): “…employ false or baseless claims, omit material information about the company’s business, exaggerate an issuer’s future potential…Typically focus on a company’s stock rather than its underlying business; use highly speculative language; often rely on grandiose numbers and figures related to the target company’s industry, business model, financial results, or business developments; tout performance or profit potential of an issuer’s security with unsupported or exaggerated statements about the stock price or its anticipated trajectory; make unreasonable claims pertaining to an issuer’s operations; suggest a promise of a specific future performance of the stock or profit to investors; provide little or no factual information about the company; omit material information; urge the investor to take action immediately as not to miss out on a great opportunity”. Thus, any PR professional is constitutionally protected by the legal doctrine of Fair Notice, which means people can't be sued by the government for something unless the rules have been made crystal clear.  Grayned v City of Rockford, 408 U.S. 104 (1972) : “…we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited…Vague laws may trap the innocent by not providing fair warning. If arbitrary and discriminatory enforcement is to be prevented, laws must provide explicit standards for those who apply them”. Congress and the SEC were asked to provide 17(b) standards. Both declined. Upton v SEC (2nd Cir., No 287, Docket 95-4044, 1986) “…we cannot defer to the Commission's interpretation of its rules if doing so would penalize an individual who has not received fair notice of a regulatory violation. US v. Matthews, 787 F.2d 38, 49 (2d Cir. 1986). “Upton claims that he should not be held liable for evading the literal proscriptions of Rule 15c3-3(e) because the Commission knew about the paydown practice well before the underlying events in this action took place and yet did not publicly condemn it until Interpretation Memo 89-10 was released on August 23, 1989. The Commission may not sanction Upton pursuant to a substantial change in its enforcement policy that was not reasonably communicated to the public. Cf. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1294 n. 13 (2d Cir. 1973) ("[F]or the future the Commission should proceed by a rule or a statement of policy that would receive wider public attention . . . and Flynn v. Bass Brothers Enterprises, Inc.,744 F.2d 978, 988 (3d Cir. 1984).” FCC v. Fox FCC v. Fox, 567 U.S. ___, No. 10–1293, slip op. (2012): The FCC long had a policy that it didn’t consider “fleeting” instances of indecency to be actionable, and confirmed it by issuing guidance. The policy was not announced until after the instances in this case. The policy in place at the time of the broadcasts, therefore, gave the broadcasters no notice that a fleeting instance of indecency could be actionable. SCOTUS concluded that “[t]he Commission’s lack of notice to Fox and ABC that its interpretation had changed so the fleeting moments of indecency…were a violation...‘fail[ed] to provide a person of ordinary intelligence fair notice of what is prohibited.’ "[The broadcasters] contend that the lengthy procedural history set forth above shows that the broadcasters did not have fair notice of what was forbidden." Christopher v. SmithKline Beecham Corp [132 S.Ct. 2156 (2012)] “[I]t is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.” The author's articles contain honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat "talking points" but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else's when making an investment decision. Always contact your financial advisor before investing in any security.

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