Leucadia Portfolio

Leucadia National is a very interesting company based out of Utah. This companies diversified operations include manufacturing, real estate development activities, medical product development, health care, winery operations, residual banking and lending activities, oil and gas contract drilling, gaming entertainment, copper mining in Spain, Australian iron mining, timber/lumber, and communication.

LUK financial documents lay out its acquisition strategy: :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.

In recent years the stock is up big on international exposure, demand for commodities, and wise investments.
If you need proof of their long-term philosophy, this is from the '06 annual: "A 15-acre unentitled air rights parcel over the train tracks behind Union Station in Washington,D.C. Entitlement is just beginning. This is one for the grandkids." How many companies openly discuss investments that won't pay for decades?

It's current portfolio of public equity includes:

Capital Southwest Corp (CSWC)
This close-ended equity fund is actually a venture capital firm in disguise.
It heavily concentrates its investments and provides business service to these
companies. From the company site: "We provide patientcapital to exceptional
businesses with significant growth potential. As a public company, we have the
flexibility to hold investments indefinitely." The companies portfolio is
diverse and they have invested in more that 160 companies in the past 50 years.
New Buy.

Georesources Inc (GEOI)
This independent oil and gas driller/explorer produces approximately 1500
barrels a day. After an April merger,GEOI has operations in the Rocky Mountains,
the Gulf Coast, and Williston Bay.
New Buy.

International Assets Holding Co (IAAC)
IAAC operates in five segments: international equities market-making,
international debt capital markets,foreign exchange trading, commodities
trading and asset management.The company offers execution in the
following products:

• 8,000 unlisted ADRs and ordinary stocks in over 20 countries

• More than 100 currencies

• Over 500 fixed income instruments in over 30 countries

• Precious and base metals offering complete physical, hedging, and investment services
  

Olympic Steel (ZEUS)
This steel processor/distributer focuses on operations in the Mid West and
the East Coast. Olympic helps its customers better manage inventory,
supply chain and increases operation efficiency. These customers include
transportation and material handling equipment, automobiles,construction
and farm machinery, storage tanks, environmental and energy generation
equipment, food service and electrical equipment, as well as general
and plate fabricators, and steel service centers.

United Western Bancorp Inc (UWBK)
A Denver based bank holding company consisting of United Western Bank,
Sterling Trust,First Matrix Investments, and Matrix Financial Services.
New Buy.

Recent Sells: ACCL, ALU, FEIC, SMMX, VECO, WINN, IMN

The annual reports make for a great read. They are as honest and informative as any Berkshire report.

Sears: A Business Plan

An easy way to determine the future of a company is to listen to the chairman, CEO, and largest investor. So why is Sear surround with speculation of liquidations, real estate sales, brand sales, or laundry lists of public takeover candidates?

Facts from Eddie Lampert:

• The company is not a real estate play.
• The company will be run as a retailer
  
• The company will not be selling its most valuable brands
• The company is pursuing lower costs of capital and improving debt levels
• The company is focused long-term and is not competing with WalMart

Combine these facts and a business plan for a quality, higher-end retail outfit begins to emerge.

Step One) Identify the best markets for Sears/KMart store locations. If Sears hopes to capitalize on its strong brands it needs to focus on higher-end customers. This means selling real estate in low end markets and keeping the proceeds on balance.

Step Two) Continue to acquire quality brand names. This winter, SHLD began its purchase of Restoration Hardware - a high quality furniture and home product retailer. Instead of building a portfolio of businesses like Berkshire, Sears can buy its own durable competitive advantages by owning strong brands. Add Restoration to Kenmore, Craftsmen, Land's End, Martha Stewart, and DieHard brands. These high-end brands support the plan of appealing to wealthier customers and command higher margins.

Step Three) Improve the cost of capital. SHLD caught a set back after the most recent quarter when S&P lowered its credit rating from B to BB. To turn this ship around management has three main tasks, continue to erase debt, hold more cash on balance, and improve cash flows (this is the most difficult task for a retailer). Lampert still believes Sears deserves an investment grade on debt.

With more cash, lower cost of capital, and improved brands Sears can afford its final and most important step.

Step Four) Nation wide overhaul of stores. In an effort to create a high quality retailer, Sears needs to drop the KMart brand name and renovate its stores to reflect the quality shopping experience that Sears hopes to create. Coupled with some good publicity and well managed renovations, Sears can return to its nationwide presence and quality reputation.

Is this the definite plan for Sears? No. But I have more evidence to support this long-term turn around than Barron's real estate play or Stockpickr's "Next Berkshire" theories. Just ask the boss.

Real Real Estate - VNO, AFP

Vornado Realty - VNO

• Office Buildings - 116 Properties - 31.7 million sq. ft. All in NYC or DC.
• Retail Buildings - 158 - 19.3 million sq. ft. In 21 states, DC, Puerto Rico.
• Merchandise Marts - 9.2 million sq. ft. Found in Chicago area.
• 47.6% ownership of 104 cold storage warehouses.
• 32.9% ownership of Toys "R" Us.
• 32.8% ownership of ALX (REIT).
• Hotel Pennsylvanian in NYC.
• Public equities - MCD, SHLD, GMH
• Lender of various construction and real estate loans.

Properties around the Madison Square project should get a boost in rental rates after completion of project. NYC real estate has not experienced any decline in prices or demand. The Toys"R"Us position allows for land bank opportunity in the struggling toy stores. The $3.60 (3.87%) dividend offers stock stability. Cherry on top: $1.6 billion in cash, short-term investments, and receivables.

United Capital Corp. - AFP

With a market cap of $210 million, AFP offers a serious steal. The balance sheets hold $116 million in net current assets including $150 million in cash. In todays tight credit markets, this is a serious advantage over the competition. So for $94 million ($210-$116= $94) you can but into AFP's real estate holdings and small manufacturer of auto components. The real estate includes 12 department stores and strip malls, 3 hotels, 54 restaurant properties, 9 NYC day cares centers, and manufacturing facilities in NJ and Mexico. 95.6% of properties leased. If that wasn't enough, the company nibbles away at shares outstanding.

Pep Boys (PBY)

Pep Boys - PBY

Forbes noted PBY as a "Buyable Buyback" with 5% of stock being repurchased but thats not all Pep Boys has going for it.

• Insane insider buying.
• P/CF x6.5
• P/S x0.27
• P/BV x1.19
• Cash + Receivables = $52.6 million
• Dividend = 2.31%

The issue is the high debt (1.04 D/E) and a low interest coverage (1.0) as well as inconsistent profitability. The stock is cheap for a very good reason but why all the insider optimism and buybacks? What do they know? Watch the quarterly results for decreasing debt and more same store consistency as managment better manages inventory. If the balance sheet improves and income stabilizes, consider buying where the insiders do: $10-12.50.