Leucadia National Corporation was a fantastic investment from its 1979 IPO at a split-adjusted $0.14 per share through early 2008 when it traded at a price of $54 per share. It was 22.8% annual compounding. Warren Buffett described the lead allocators of Leucadia, Joe Steinberg and Ian Cumming, in terms that would suggest he regarded them as investor equals.
I am always interested in these companies that had track records of twenty-percent or greater annual returns but never quite entered the common knowledge of the financial media at large. I am also interested in the fact that the company fell from $54 to the teens in 2019 and has delivered negative returns for investors over the past eleven years (while now trading under the new Jefferies).
The reason why Leucadia is rarely discussed is because the company’s outsized success was much more driven by intelligent moves (in which timing was a critical component) rather than the accumulation of excellent businesses.
For instance, it bought Colonial Penn outright in the early 1990s (after making a sizable investment in it in the late 1980s) and then sold it to GE Capital at the height of the dotcom boom in the late 1990s.
Armed with capital, it showed up for the bankruptcy estate of Williams Communications in 2002. Most investors noticed that it capitalized the firm with $150 million and gobbled up 44% of the equity for WilTel Communications Group, but it also bought the substantial tax credits of Williams that enabled it to shield future gains from tax payments. In 2004, it funded Bill Ackman’s investment in General Growth Properties (again, out of bankruptcy) which quickly generated a thirteen-fold return. Because the firm was armed with Williams Communications’ tax credits, it paid almost no taxes on this capital gain.
In due course, Cumming and Steinberg retired. The stock has lost over half of its value.
I would argue that the company has become unremarkable because it lacks a foundation. There are no great businesses within it–there were just businesses that were primed up for sale at a high price, shrewd bankruptcy pickups, and the use of financial engineering courtesy of the administrative state (i.e. the tax credits).
Every now and then, I get asked what I think about these types of firms whose success is management-driven. My answer is that I value them in a similar fashion to a royalty trust energy pipeline that has a 25-35 year shelf life. If you see the company selling at a deep discount compared to its lifetime value and there is a multi-decade stretch ahead of it, sure. After all, those 22% returns were real (and therefore have value) but not sustainable (and therefore need to be discounted). Nowadays, Jefferies is just a random financial conglomerate. The financial engineering magicians are gone.
