Leucadia Reloaded!

[biaggio]

Thanks Scorpiancapital.

Agree that if BV grows at 19%, a good buy paying current asking price...normally, I just like to have that 19% growth as a bonus.

[Myth465]

Thanks Scorpiancapital.

Agree that if BV grows at 19%, a good buy paying current asking price...normally, I just like to have that 19% growth as a bonus.

 

Same here especially in this case, due to the fact that its based on successful deal making. With that said, I like LUK and its becoming easier and easier to get comfy with, and I will be buying sooner or later. I kinda like the mining because its a decent inflation hedge, and really like the focus towards higher quality businesses.

[scorpioncapital]

Thanks Scorpiancapital.

Agree that if BV grows at 19%, a good buy paying current asking price...normally, I just like to have that 19% growth as a bonus.

 

It's a catch 22, you either have to buy it during periods of panic, but how can we know those ahead of time or you have to find a long stretch of undervaluation - but if you find a long stretch of undervaluation then something has gone wrong, namely it is less likely that you'll get your 18%. In other words, if it sells for 50% of book, it may be that you'll now be getting 9%, the addition of the two should, theoretically, amount to the same end result (9% return to book + 9% annual return = the same 18%). Really an irrational panic is the best time to buy but you have to determine if a) it's an irrational panic or b) something has changed about the company.

[biaggio]

"Really an irrational panic is the best time to buy but you have to determine if a) it's an irrational panic or b) something has changed about the company."

-ideally if you have done your homework ahead of time (which I wish I had done), then you re prepared ahead of time + can take advantage of the price when  indiscriminate selling occurs.

-I picked up a small position today, hoping that I get a chance to buy more later

[rohitc99]

biaggio - i have been doing a sum of parts valuation (looking at each investment/ operation etc individually). I have come up with a valuation of around 8 Bn (including the NOL @1.3 Bn and excluding the 1.9 Bn debt).

 

The valuation is quite crude and has a lot of approximations and assumption..but in the course of looking at each piece i found quite a few interesting investments

 

- CLC mining : at 30% stake, the mine is not fully operational. at current copper prices, the NPV comes to around 800 Mn.

- JHYH : could be worth 500 mn or more

- fortesuce notes and stock investment

- found an investment (cant recall the name) which had been written down and was sold at 3 times written value for a gain of around 40 Mn

- investment in MBS and other such instruments which could be profitable in future.

- berkadia : i think we can safely assume that this will do well and is definitely worth more than book

 

The more i read about the company, the more i realise there is hidden value which could get unlocked in time. either that or i am getting too optimistic about the company  :)

[DCG]

The reason I've had such a hard time valuing this company is that so many of the companies they own (or are invested in) are such volatile businesses with unpredictable revenue. As rohitc99 just mentioned, the fact that they own some businesses which "could be profitable in future" makes it tough to value some of their business/investments. They have a strong history of getting these type of companies turned around, but it's still a big unknown, especially with the 'time' aspect of those turnarounds.

[twacowfca]

The reason I've had such a hard time valuing this company is that so many of the companies they own (or are invested in) are such volatile businesses with unpredictable revenue. As rohitc99 just mentioned, the fact that they own some businesses which "could be profitable in future" makes it tough to value some of their business/investments. They have a strong history of getting these type of companies turned around, but it's still a big unknown, especially with the 'time' aspect of those turnarounds.

 

 

Yup.  But they buy them with a huge margin of safety on the average.

[scorpioncapital]

"such volatile businesses with unpredictable revenue. As rohitc99 just mentioned, the fact that they own some businesses which "could be profitable in future" makes it tough to value some of their business/investments."

 

Actually I find this a fascinating subject. Consider a predictable business a la Coca Cola whose earnings and future can be modelled with greater certainty. Such a business should theoretically be easier to value and without making any calculating mistakes, an investor can get a reasonable return and sleep well at night. Buffett loves these kind of situations...

 

However,

 

There is another situation which is equally lucrative and that is the Leucadia model of making investments with intrinsically volatile and sometimes uncertain outcome. This is not to say it isn't a probability play or that a baseline value is not available, but the future outcome has more possibilites and valuation ranges. Why is this model also good? Because as Buffett mentioned, there is a volatility arbitrage trade, namely the trade where you know more than the market and are willing to give up certainty for the extra return possible where the market cannot so easily value the future cash-flows. I am very comfortable with this model and feel that in today's semi-efficient market environment, this is one of the few opportunities for outperformance. Embrace the volatility, with intelligence and being an astute deal maker, and you stand to do very well.

[rohitc99]

The reason I've had such a hard time valuing this company is that so many of the companies they own (or are invested in) are such volatile businesses with unpredictable revenue.

 

I agree with your statement and although it would be nice to have a predictable business selling at cheap valuation, i think that is unlikely to happen unless there is a full panic. and even then although the business is predictable, the environment is not

 

I am looking at LUK with a range of values. The upside is limited by one's imagination :) or whatever one is smoking. I am trying to avoid getting too giddy by looking investments of the type of Fortesuce notes and assuming that they will be able to get full value (though makes me wonder what the other party was thinking at the time they accepted this offer )

 

personally, i am trying to be as conservative as possible (future will tell if i was conservative enough) and trying take book value in some cases where the investment is not impaired and the management seems reasonably optimisitic (for example keen ). In other cases there is more data such as for ACF, CLC and other positions ..so i am trying to figure a more reasonable valuation (book value may be too low in such cases).

 

I think my final assumption is that a management which has grown book value over 19% for such a long period of time has not gone bonkers all of a sudden..so hopefully the past will repeat in the future

[bargainman]

Speaking of volatility, LUK is a reasonably good options candidate.  Just sell puts to acquire or after a big drop.  The premiums are pretty good because it's such a volatile stock.  Long term though you know they're going to create value...

[txlaw]

I just read the post on the big bank foreclosure halt and the possible moratorium on foreclosures (if you listen to Geithner's interview, the full moratorium seems like a remote possibility).  There was an interesting article that was posted there from Yahoo Finance.

 

I have been thinking a bit about Berkadia, and I wonder what sort of market share grounds they can make by entering into the residential mortgage servicing business.  As I understand it, Berkadia only services commercial mortgages and multifamily residence mortgages. 

 

These guys are so sophisticated, I have to wonder whether they saw this coming, just as they saw the benefits of being the best non-prime auto finance company in the biz (ACF).