Equity Research & Investment Analysis

Everyone has heard the theory that no investor can expect to consistently beat the market over the long term; the stock market today is simply too efficient. Of course, in most cases this sentiment is correct; it is exceedingly difficult to be on the right side of the market year after year. However, there are exceptions to every rule and one exception to this investment adage is Leucadia National Corp. (LUK). To be fair, LUK does not outpace the market every year, but over the long haul its performance is undeniable. From 1979 through the end of 2007, this diversified holding company has returned a gaudy 26.2% per year versus an annualized 9.8% return on the S&P 500. Yet, there is relatively little buzz about LUK and also fairly little information available about the company—but this is certainly a story that should be told.

The key to Leucadia’s success has to be the talented men that steer the strategic vision of the company: Ian Cumming and Joseph Steinberg. These two gentlemen have successfully navigated the ups and the downs over the last few decades always with a firm grip on macroeconomic trends. For example, as they describe in their annual letter to shareholders, after observing the simultaneous rise of population and standard of living in Asia (China and India in particular), Cumming and Steinberg sensed opportunity. Realizing that infrastructure expansion in these regions would surely be necessary to foster further growth, they invested in copper and steel mining operations. As they surmised, global demand for basic materials ramped up in a big way—with prices following suit—and now their investments are paying off. This is just one demonstration of the fundamentally sound and profitable vision of these two leaders. Their management style is to find and exploit under-appreciated value in the marketplace, and in my opinion it is an approach that is part science and part art.

Leucadia has a diversified portfolio of businesses that are either partly or wholly owned. LUK has invested in industries ranging from mining, drilling and real estate to specialized wineries, international pre-paid phone cards and sub-prime auto loans. Essentially, as long as there is untapped value, it seems that no industry or business is off-limits for the company. An incredibly simple approach for two of the most sophisticated investors of our time, and one of their key guiding principles is merely: don’t overpay! Is it any wonder that Ockham Research (remember our namesake Ockham’s razor) has admired Leucadia’s investment style and abilities for some time now.

Ockham Research currently rates LUK a hold because— according to our methodology— the company is trading within our expected price range. Based on the average level of price-to-sales and price-to-cash flow over the last ten years, we would expect to see LUK trade for $47.80 given current levels of revenues and cash flow. The stock was knocked down more than 5% in today’s brutal market to below $43. We view LUK as an attractive opportunity for long-term investors to hitch a ride on the rising star that is Leucadia’s management team. They have demonstrated insight into the market that is all too rare. There is still time to grab a piece of their investing prowess as both Chairman Cumming and President Steinberg have signed on through 2015.

Leucadia National—Consistently Ahead of the Curve