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Leucadia National: Another Berkshire?

 May 11, 2012 03:31 AM

(By Gavin Graham) Our latest recommendation Leucadia National (LUK) is a diversified conglomerate with a long-term approach; indeed, the company could be viewed as another Berkshire Hathaway.

It has been run by the duo of Ian Cumming and Joseph Steinberg since 1978. Over that time, book value has compounded at 18.5% per year, compared to 8% for the S&P 500 with dividends reinvested. Leucadia's market price and shareholders' equity have compounded at 19.8% and 19.1% respectively over that period.

This excellent track record has not come without volatility. Although Leucadia's stock was up eight out of past 10 years, it fell 58% in 2008, compared to a 37% decline in the S&P 500, and was down 22% last year while the index was up 2%.

However, volatility is not the same as risk. Warren Buffett has famously said he would much rather make a lumpy 15% than a smooth 12%, especially as the lumpiness of the return will deter investors who have a low tolerance for volatility.

Messrs. Cumming and Steinberg fall into the same camp and an examination of their largest and single most successful investment reveals a great deal about the reasons for their success.

Believers in the long-term growth of Chinese demand, in August 2006 Leucadia invested $400 million, or almost 15% of its shareholders' equity, in Australian start-up iron ore miner Fortescue Metals Group.

This investment has proven to be an enormous success, and Leucadia has taken the opportunity to crystallize profits. It sold 117.4 million shares last year for $732.2 million, as well as receiving $193 million in royalties net of withholding taxes.

It sold another 100 million shares for $506 million in the first quarter of 2012, leaving it with 30.586 million shares worth $186 million and another seven years on the royalty note. Leucadia has taken the same bold approach to several of its other investments. It swapped its interest in a Spanish copper project, Cobre Las Cruces, for a shareholding in Canadian miner Inmet, becoming largest individual shareholder.

Leucadia also owns a 29% stake in Jefferies, which cost $980 million. Jefferies is a leading U.S. middle market full-service investment bank and broker, with 30 offices in 11 countries. Messrs. Cumming and Steinberg sit on its board of directors.

Leucadia increased its position in Jefferies in 2008-09, when investment banks were probably the least popular sector in the entire market. Its willingness to take large positions when it is convinced of the underlying soundness of the business has been a hallmark of its management.

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