Period: Q1 2013
Portfolio date: 31 Mar 2013
No. of stocks: 2
Portfolio value: $36,672,000
|Stock||% of portfolio||Shares||Recent activity||Reported Price*|
|hist||INTL - INTL FCStone Inc.||76.82||1,618,044||$17.41|
|hist||COWN - Cowen Group Inc.||23.18||3,014,807||Add 50.44%||$2.82|
* Reported Price is the price of the security on the portfolio date. This value is significant in that it indicates the portfolio manager's confidence in the stock at that price and suggests at least some level of undervaluation and/or margin of safety.
Sector % analysis
Articles & Commentaries
Investment company Leucadia National Corp (LUK) said it will buy Jefferies Group Inc (JEF) in a deal that values the investment bank at $3.6 billion. Leucadia, which has been called a mini Berkshire Hathaway (BRK-A) for its holdings ranging from real estate to mining, already owns about 29 percent of Jefferies.
In a SEC filing today, Leucadia National reported increasing its stake in Jefferies Group by 1 million shares at an average price of $11.84 per share.
We breathed a sigh of relief when 2010 wound to an end. 2008 was the infamous year. A group of bankers and financial engineers almost brought down the U.S. economy and subsequently a significant portion of the global economy as well. Happily, the past two years have been different. The financial carnage brought on by excessive risk taking is beginning to repair itself and the world’s economy is recovering.
Jefferies Group, Inc. (NYSE:JEF) is a full-service investment bank and institutional securities firm. Jefferies offers its customers capital markets executions, mergers and acquisitions, restructuring and other advisory services. They have 30 offices in 10 countries.
In April 2008, Leucadia sold to Jefferies 10 million Leucadia common shares and received 26,585,310 Jefferies common shares and $100 million in cash. Including shares acquired in open market purchases, Leucadia owns 49,351,385 Jefferies common shares, approximately 28%, for a total investment of $812.4 million. At December 31, 2010, Leucadia carries Jefferies on its books at fair value of $1.3 billion. Separately, our investment in Jefferies High Yield Trading, LLC had a decent year and earned 6%.
In the last few years Jefferies has expanded across the globe and hired, from other similar institutions, talented people or groups thereof, moving from a boutique firm to a worldwide full- service investment bank. Quite an amazing feat in a challenging economy!
We have known the Chief Executive, Richard Handler, for a very long time and hold him in very high regard. We believe that he and his colleagues will continue to enrich their shareholders.
2008 was an infamous year, not unlike 1929. A group of financial engineers almost brought down the U.S. economy and subsequently a significant portion of the world’s as well, resulting in a deluge of red ink. Happily, 2009, was much different. There is increasing evidence that the financial carnage brought on by excessive risk taking is beginning to repair itself. In 2009, Leucadia recorded $550.3 million in profits while shareholders’ equity grew $1.7 billion.
We concluded last year’s letter by hoping that despite our “Fortress Leucadia” mentality, “we will continue to look for companies to buy, but only consider companies that earn money, have a bright future and are durable!”
Our newest addition is a good start on that promise. Berkadia Commercial Mortgage LLC is now the country’s largest non-bank owned provider of commercial mortgage servicing. We purchased the business out of the bankruptcy of Capmark Financial Group Inc. Berkadia, a 50/50 joint venture with Berkshire Hathaway, acquired Capmark’s servicing assets and loans with $434 million of partners’ equity and a line of credit from Berkshire. The foundation is in place for a business with solid, long-term growth.
At December 31, 2009, we owned approximately 25% of the outstanding common shares of AmeriCredit Corp. (NYSE: ACF) for an original cost of $418.6 million. ACF is an independent subprime auto finance company that purchases and services automobile sales finance contracts, typically for consumers who struggle to obtain traditional financing from a bank or manufacturer’s captive finance company. At December 31, 2009, our investment in ACF is classified as an investment in an Associated Company and is carried at fair market value of $639.8 million.
For almost 20 years, we owned a similar business and as a result carefully followed ACF. ACF’s large volume and efficient processing and underwriting abilities made it a fierce competitor. In 2004 we exited our business, deploying our capital elsewhere, rather than fighting a pyrrhic war with larger, more efficient competitors, some of them willing to accept puny returns. But, we retreated with our eyes open. We observed that in previous recessions ACF suffered its share of poor credit performance; however, when a recovery was underway ACF made larger profits by being able to select more credit worthy customers and to charge more for loans.
Although the current recession has been much harder and deeper than we anticipated, ACF performed as expected. ACF is acquiring more credit worthy customers and is able to charge higher rates. Credit performance is improving. Securitizations, which were completely frozen until the Federal Reserve’s TALF program got rolling, have come back to life. During 2009, ACF issued two separate TALF-eligible securitizations, one of which had investors who benefited from the TALF program. All indications are that ACF has adequate liquidity for the foreseeable future.
Jefferies (NYSE: JEF) is a full-service global investment bank and institutional securities firm. Jefferies offers its customers capital markets executions, mergers and acquisitions, restructurings and other financial advisory services.
At December 31, 2009, we owned approximately 29% of the outstanding common shares of Jefferies for an investment of $794.4 million (the largest single investment we have ever made). The fair market value of our investment was $1.2 billion at December 31, 2009.
Jefferies is not in trouble, not a ward of the U.S. Government, not burdened by toxic assets and not overleveraged. Its employees own a substantial interest in the firm and their pay expectations are being managed with the best interests of the firm in mind.
Jefferies has successfully hired talented individuals from troubled or failing firms, acquired a municipal bond trading and underwriting business, became a Primary Dealer in U.S. Treasuries and many other governments’ bond issues and also expanded its global fixed income and commodities business. We believe that Jefferies, unscathed by the imprudent and irresponsible behavior of other investment banks, will thrive as the world’s economies improve and will increase its market share and profits. It doesn’t hurt that some of its competitors have gone out of business.
Most of our assets are tied to a recovery in the world’s economy. In 2009, we have seen the baby steps of recovery. We hope the baby does not flop back on its bottom. In the current recessionary environment, earnings from our operating businesses and investments do not cover our overhead and interest. We have cash, liquid investments and securities and other assets that should carry us through these difficult times. We are energetically cutting costs. We have talented managers and employees working hard every day.
Out of prudence we take a pessimistic view as to when this recession will end. To think otherwise would be a gamble that we are unwilling to make.
In these troubled times there are sure to be opportunities for investment and we will remain on the hunt. The acquisition by Berkadia is the first fruition of that hunt. We recognize a good deal when we see one and will strive to execute.
We intend to resist what we consider “financial bets.”