2 Great Managers, 1 Undervalued Company

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I may have to disagree with Peter Lynch. Before you click the back button and spit on the computer screen, just wait a second. One of the famous Lynch-isms is, "Go for a company that any idiot could run, because sooner or later an idiot is probably going to run it." I agree with the idea of investing in simple, easy-to-understand businesses, but I don't mind having a company that requires talent and has it. Contrary to many Fools, I don't need to hold on to a stock for life. A company that has been well run for a few years and looks to stay that way is just as worthy as any other stock pick in my book. Here is one such company that should appeal to value lovers of all kinds.

Let's get to it
I want to reiterate and expand on my bullish call on Leucadia (NYSE: LUK  ) . For several months, I have found Leucadia to be a strong performing mutual fund-like investment without the silly fees. It's a similarly structured company to that of all time Fool-favorite Berkshire Hathaway (NYSE: BRK-B, NYSE: BRK-A). Leucadia is a holding company for many different businesses -- providing capital support and taking partial or total ownership of its subsidiaries. It is a well-diversified portfolio -- with positions ranging from a 30% stake in Jefferies (NYSE: JEF  ) to a group of vineyards. The stock has barely budged in the past year -- sitting right around $23 per share. The company's long-term growth, however, has been far from stagnant. Since 1979, the company has managed to compound its book value by 19.1%.

The two men at the helm of Leucadia are Ian Cumming and Joseph Steinberg. Between the two, they own 24% of the company -- ensuring their interests are just as aligned as yours. The two are elderly, with one already stating he will retire in the year 2015. But holding such a vested interest in the company, one can be sure he will do everything in his power to make sure the company is in a strong position moving forward.

When investors look at insurance companies or holdings companies such as this one, they most often use the price to book ratio as an indicator of valuation. Berkshire Hathaway, for instance, trades at 1.2 times its book value. Leucadia currently trades at 0.92 times its book value but has historically traded closer to 1.5 times -- suggesting it is quite undervalued. The managers have a phenomenal track record of buying businesses at prices substantially under their intrinsic values.

Steel this stock idea
In 2006, Leucadia bought into an Australian steel company, Fortescue Metals. Cumming and Steinberg bought $442 million worth of stock and a 13-year $100 million note with a 4% royalty payment. After all was said and done, Leucadia's $442 million investment yielded the company a $1.76 billion payout six years later.

Cumming and Steinberg are Buffett-esque investors with an eye for cheap companies in promising macro environments.

So what's the downside?
With Leucadia's 30% ownership of Jefferies, it is closely tied to the performance of the investment bank. On multiple occasions in the past, I have made clear my interest in Jefferies and consider it to be the strongest of any investment bank stock pick. Though, as with any stock, the situation could change and Leucadia would change along side it.

Other bear arguments consider Cumming and Steinberg leaving the company in the coming years. Similar to many arguments for Berkshire, I believe the two showrunners have set up the company to remain in a strong position and actually improve once new management is in place.

One thing that investors certainly don't need to worry about with Leucadia is debt. Over the past few years, the company has been paying down debt, reducing its leverage by 40%.

The company is priced to underperform, and its book value assumes the overall trend for its assets is negative. I find it hard to believe that the company's 80% stake in National Beef will yield negative results, as the beef processor should only benefit from the United States' growing beef exports. I also highly doubt that the company's 50/50 joint venture with Berkshire -- called Berkadia -- will falter given the rebound in housing and the company's access to Berkshire Hathway's mortgage portfolio -- which Berkadia would service.

I love investors
I have an (un)healthy respect for talented capital allocators. But really, what better a way to learn than to follow the actions of the best? If you are curious like me, check out this special free report about stocks the very best investors in the world are buying.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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10/26/2016 4:00 PM
BRK-A $215840.00 Up +590.04 +0.27%
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