Leucadia National (LUK)

LUK was founded in 1854. It engages in manufacturing, telecommunications, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations. It is run by two very talented managers- Ian Cumming and Joseph Steinberg, who have received praise from Warren Buffet.

LUK has been depressed recently because the company recently made large investments in two financial stocks: 27.5% of Jefferies & Company (ticker:JEF) and 25.6% of Americredit (ticker:ACF). Since LUK owns over 20% of the stock in these companies, they use the "fair value" method of accounting, where the stock value is marked to market on the balance sheet.

It is quite possible that LUK will trade lower if the bear market in financials resumes, so it is recommended gradually scaling into LUK stock to build a position. LUK pays a small dividend, but is relatively tax friendly and can be owned in taxable accounts. LUK is a hard stock to buy at a cheap price, so it is better to be early and accept some short term weakness.

This company's diversified operations include manufacturing, real estate development activities, medical product development, health care, display winery operations, residual banking and lending activities, Oil and gas, gaming entertainment, copper mining in Spain, Australian iron mining, display timber/lumber, and communication. This gives it excellent exposure and a diversified operations base, which would provide a hedge in the coming slump.

Leucadia's (LUK) investment in AmeriCredit (ACF) was a wise one. Based on the company's history, we ought not be surprised. On Tuesday, ACF said delinquency and gross charge-off rates in its subprime trusts improved in February, while net charge-offs increased by 1.1 percent month-over-month. The results are showing a seasonal improvement and unlike its mortgage brethren, results are not showing deterioration.

Charge-offs are rising and one would expect that to continue, the ultimate pain to be below the mortgage industry, for the simple reason that folks can walk away from a home and move into an apartment, in most cases they need their cars to get to work.

Assuming the same general trend in the second half, expect EPS to be approx. $1 a share for 2008. Potential ACF value investors may get a beneficial calendar anomaly here. All expectations are for a second half 2008 recovery in the general economy. That coincides with Q1 and Q2 2009 for ACF. While 2008 got caught perfectly for the negative events of the year, 2009 looks to be positioned perfectly for the recovery.

This means that this year's expected disappointment may be met with out-sized improvement next year. If the company can just match 2007 performance, the stock currently trades at 4.3 times those earnings. Matching those earnings ought to be a bit easier in 2009 as a lower cost of capital vs. 2006 will give a boost to margins as borrower rates ought to remain a bit elevated. Should the economy lag into 2009,still expected to have a significant improvement of over the $1 this year.

In identifying possible acquisitions, the Company tends to seek assets and companies that are out of favor or troubled and, as a result, are selling substantially below the values the Company believes to be present." For example, the company purchased and is rebuilding 'The Hard Rock Biloxi' after is was destroyed in Hurricane Katrina.

This gives it good exposure to companies that would come up in the near future.