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Invest Like Buffett With This 'Baby Berkshire'

 May 30, 2014 07:34 PM

Sad to say, Warren Buffett will not be around forever.

There is no question that what he has done at Berkshire Hathaway (NYSE: BRK-B) is nothing short of miraculous. Trying to replicate Buffett's success is nearly impossible. However, if there is one thing managers can do, it is learn from Buffett.

There is a publicly traded company with a similar business model as Berkshire. It buys great businesses for less than fair value and then develops them into rewarding investments. Even better, this company is cheaper than Berkshire.

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Leucadia National Corp. (NYSE: LUK) has been called the "mini" or "baby" Berkshire Hathaway for a number of years. A diversified holding company like Berkshire, Leucadia is only about a thirtieth its size in terms of market cap.

Leucadia's largest business is investment bank Jefferies Group, which it acquired in 2012. But it also owns the U.S.'s fourth-largest beef processor, National Beef; a 50% interest in a venture with Berkshire for real estate lending, called Berkadia; the 15th-largest U.S. auto dealer, Garcadia; and various other businesses, including restaurants, telecom and real estate.

Leucadia's similarities to Berkshire are downright scary. While Berkshire relies heavily on its insurance operations like GEICO and Gen Re, Leucadia relies on its investment banking business at Jefferies.

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Leucadia is looking to beef up Jefferies' operations in its asset management, fixed-income and brokerage businesses. Jefferies just hired the former head of wealth management at Morgan Stanley (NYSE: MS) to boost its wealth management business.

Both Berkshire and Leucadia invest heavily in the energy sector. Berkshire acquired MidAmerican Energy in 2000 and has been building its utilities business ever since.

Leucadia has big investments in liquefied natural gas (LNG). Earlier this year, Leucadia applied for a permit from Canada's National Energy Board to export 1.3 billion cubic feet per day of natural gas from fields in British Columbia and Alberta to Leucadia's proposed plant in Oregon. If all goes according to plan, Leucadia will be one of the few companies capitalizing on the higher natural gas prices in markets outside of North America.

Leucadia and CEO Richard Handler are also becoming lifelines for companies in trouble, just as Buffett has been for such companies as Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC).

When Philip Falcone and his Harbinger Group (NYSE: HRG) were looking for capital, they went to Leucadia. Leucadia's investment in Harbinger Group has increased more than 50% in value, to $244 million.

Because of this success, Leucadia agreed to increase its investment and did another deal with Falcone for $253 million in preferred stock in Harbinger. Once the shares convert to common stock, Leucadia will own about 20% of Harbinger at an average price of $9.80 per share compared with Harbinger's current share price of around $12. These are the types of deals Berkshire and Buffett are great at orchestrating.

Leucadia's performance has attracted the attention of other high-profile investors. Bruce Berkowitz and his Fairholme Funds own almost 5% of the company. Barry Rosenstein's Jana Partners just purchased 2% of the company. However, the investors with the most to gain are the folks running Leucadia: Insiders own over 13% of the company.

It is easy to see why investors such as Rosenstein and Berkowitz own Leucadia. Leucadia trades at a price-to-book ratio (P/B) of 0.8. Compare that with Berkshire at 1.4 and Liberty Capital Group (Nasdaq: LMCA) at 1.0.

Risks to Consider: Leucadia's largest subsidiary is Jefferies, which relies on the financial markets for its revenues and profits. A severe economic slowdown would reduce investment banking activity and trading revenues. Furthermore, Leucadia has invested billions of dollars across a variety of businesses, many of which are susceptible to broader market conditions. Any economic slowdown could negatively affect Leucadia's revenue.

Action to Take --> Buy Leucadia with a target price of $30. That is 20% upside and assumes Leucadia should be trading at book value, which is more in line with its peers and historical average.



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