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Back in March of 2009, when the market was cratering, I grabbed a harness, strapped it around my waist, and held onto the side of my house as the ground caved in beneath me.
At the same time, I mentally put together my shopping list of stocks. There were several world-class companies that were being hammered, and I knew the time was about right to run to my computer, and buy, buy, buy. My first choice was Leucadia National Corporation (NYSE: LUK ) , a stock I'd been watching for many years, but always waited in vain for it to drop big so I could buy in.
Normally, I have pretty strict criteria for what stocks I buy, but in a market crash like last year's, many of those rules get suspended. In uncertain times, you must be flexible. The reason I chose Leucadia first is because I instinctively knew that this was a company that would still be standing while others lay in crumpled heaps at the bottom of the aforementioned crater. It had survived other crashes. It would survive this one.
My decision was based on several factors.
- Business model
- Track record
Picking up Leucadia's pieces
Chairman Ian Cumming and President Joseph Steinberg have been with Leucadia since the late 1970s. Consistency of management is sometimes hard to find, but 30 years running the same company tells me that these two men are totally devoted to Leucadia and its shareholders. You did not see them cashing in their stock, stuffing their pockets full of cash, and running for the hills. That's because they've always put their insider holdings where their mouths are. Mr. Cumming directly and indirectly holds over 22 million shares, or about 7% of the outstanding shares, while Mr. Steinberg owns over 25 million shares directly and indirectly.
I'm always leery of comparing any company to Berkshire Hathaway (NYSE: BRK-B ) , but the truth is that Leucadia is a diversified holding company in a variety of businesses. Here's just a sample of what they own: timber, plastics, prepaid phone cards, oil and gas drilling, timeshare management, gaming, real estate, land development, medical product development, a winery, 25% of subprime auto financier AmeriCredit Corporation (NYSE: ACF ) , and a 29% stake in the investment bank Jeffries Group (NYSE: JEF ) .
Can you feel the love? All those juicy businesses wrapped up under one banner? It's like having your own private entrepreneur doing legwork just for you. And like any good entrepreneur, they don't just buy things willy nilly. They have a specific set of rules for what they choose.
Leucadia's "Rules of the Road" are:
- Don't overpay, no matter what the madding crowd is up to.
- Buy companies that make products and services that people need and want, and provide them as cheaply as possible with consistent high quality. Lower cost and higher quality is a relentless and never-ending task.
- Earnings sheltered by NOLs are more valuable than earnings that are taxed!
- Compensate employees for performance, and expect hard work and honesty in return.
- Don't overpay!
All these businesses give Leucadia a great deal of flexibility. It has $154 million in cash on its balance sheet as last reported, and holds large chunks of public companies such as Jeffries, AmeriCredit, and even Australian stocks. Therefore, Leucadia can raise cash whenever it needs to via stock sales. Cash on hand, coupled with revenue from all its different sources, has been more than enough to cover interest payments on $1.66 billion in long-term debt. Liquidity rules.
Leucadia even has a shareholder bonus associated with owning all these different entities. See, if any of them have a net operating loss carryover on their books, Leucadia absorbs it -- at this time, they've got $6 billion worth. This means that when they sell some of their assets, or realize profits from some of them, they pay no tax. This is reminiscent of another of my favorite companies, Liberty Media (Nasdaq: LINTA ) , whose visionary, Chairman John Malone, created complicated deal structures to avoid paying income tax to the federal government.
House of bricks
Leucadia's returns have been stellar. It went public in 1987 -- around the time of the big crash -- at an adjusted price of $0.18. Today it's over $25. You've made almost 140 times your money in 23 years. The S&P 500 has "only" quadrupled during the same period.
So back in 2008, when the stock fell off a cliff, and again in 2009, when it kept tumbling, you may now understand why I jumped in. I mean, when a company like this drops 50%, 60%, or 70% off of its highs, the time was right to go get a bargain.
Someday, after the world has been obliterated in by our own hand, or by freaky green aliens from another planet, living organisms will make their way to the one place they will be able to rebuild from: Leucadia's headquarters in New York. It's likely to be the only place left standing.
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