Diversification is every investor's best friend.
The basic idea behind diversification is that the good performance of some investments balances or outweighs the negative performance of other investments. Over time, the offsetting effects of gains and losses leads to an overall decrease in risk.
Sometimes a single company is so diversified that any investor that owns its stock captures those benefits. Conglomerates like Berkshire Hathaway (NYSE: BRK-A) scoop up ownership in a bunch of different public and private companies, making them de-facto mutual funds.
Today we're taking a look at Leucadia National Corporation (NYSE: LUK), a company that's been around for more than 30 years and has amassed ownership positions in a broad array of interesting businesses. As a diversified holding company, Leucadia has aggregated an impressive list of assets.
Simply put, it buys well-managed companies that make high-quality things that people need, but it only buys those companies when they are at prices that underestimate their true worth. Sound familiar? That strategy is a hallmark of value investors like Warren Buffett and Peter Lynch.
Let's take a look at Leucadia's portfolio to see what they own:
-- 25% of AmeriCredit Corporation (NYSE: ACF), which handles subprime auto loans
-- 29% of investment bank Jeffries Group (NYSE: JEF)
-- 9% of Australian miner Fortescue Metals Group and 10% of Canadian miner Inmet Mining Corporation
-- 75% of STi Prepaid (prepaid phone cards)
-- 92% of Sangart (biopharma product development)
-- 100% of Conwed Plastics (held for 25 years), Idaho Timber, Keen Energy Services (an oil and gas driller), ResortQuest (timeshares), the Hard Rock Hotel & Casino Biloxi, Crimson Wine Group, Garcadia (auto dealerships), and multiple investments in real estate, gasification, and natural gas transport.
Now that's what I call 'diversified.'
Leucadia takes another page out of the value investor's handbook by maintaining a core management team comprised of long-term owners. Chairman Ian Cumming and President Joseph Steinberg have been with Leucadia for more than 30 years. These men, not unlike Warren Buffett, are totally devoted to one thing: running their company. Devotion like that means that shareholders know what to expect from the stewards of the company. These two gentlemen directly and indirectly own 14% of Leucadia, providing an alignment of shareholder and management interests.
Furthermore, Leucadia's businesses generate plenty of cash flow beyond what's needed to service debt. It has more than $150 million in cash on the books, just in case it sees worthwile targets ripe for the picking. And in the event that Leucadia spots a bargain and needs to raise cash for an acquisition, it has given itself a huge advantage by holding stakes of publicly-traded companies in addition to private firms -- Leucadia can quickly raise cash by selling portions of their publicly-traded stock holdings.
Rarely can investors find a company as well run as Leucadia. The company lost -75% of its market value between June 2008 and March 2009, and despite having doubled off its low, still sits 50% below its all-time high. I see no reason why it could not return to those levels, particularly as the economy improves.
