Monday, August 20, 2007

Invest in Cash Rich Companies Run by Guru Investors

With the U.S. suffering a liquidity crunch, the advantage goes to companies with a lot of cash. When the allocator of this cash is a Great Investor who can properly find great values in distressed companies and often take controlling stakes in companies, the advantage is even greater.

There are two interesting companies that fit that mold, that are perfect for today's cash strapped market.

1. Leucadia (LUK)

Leucadia (LUK) is a company that many call a mini Berkshire Hathaway (BRK.B), Warren Buffett's Company. Management is excellent, led by Guru Investor Ian Cumming and Joseph Steinberg. In 1978, Cumming and Steinberg banded together to take control of the company for $100,000 of their own money and $1.2 million from others to grow it to a $10 Billion company today. Both are still active in the company and as of 2007, Mr. Cumming is 65 and Mr. Steinberg is 63 years old.

Leucadia is a holding company that uses a deep value investing approach, buying distressed companies at discount prices, and sell them for profits.

Leucadia invests in a diverse group of companies from medical companies to manufacturing companies and often takes contolling positions in companies. The site shows a selection of companies that Leucadia invests in.

In a shareholder letter, Mr. Cumming and Mr. Steinberg say:
"We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe there are. From time to time, we sell parts of these operations when prices in the market reach what we believe to be advantageous levels. While we are not perfect in executing this strategy, we are proud of our long term record…. We believe we are conservative in our accounting practices and policies and that our balance sheet is conservatively stated. To mutilate a hackneyed phrase, we are old dogs and we can't learn new tricks-we believe the ones we learned over the last 30 years continue to work just fine."

The company's stock has held up very well despite the recent market correction, and it is near its all time high. In March 2007, they announced a stock buy-back program. Leucadia is going to join the S&P 500 index on August 24, 2007.

2. American Real Estate Partners (ACP)

Veteran activist Investor Carl Icahn is now bringing 10% of his fund public though American Real Estate Partners. American Real Estate Partners is a $6.6 Billion company that engages in the gaming, real estate and home fashion businesses in the United States. They own and operate gaming properties in Nevada such as the Stratosphere Hotel and Casino in Las Vegas. The company has $3.4 Billion in Cash, more than 50% of its market capitalization.

On August 9, 2007, the company announced that it is acquiring $810 Million of Icahn Funds, a group of investment funds managed by Icahn, valued at $7 Billion. The deal also includes contingent earnouts up to $1.1 billion depending on the earnings of the fund management business.

Carl Icahn will also become chairman of American Real Estate Partners and chief executive of the Icahn management entities just acquired.

American Real Estate Partners now has a lot of cash, real estate properties, and a great investor in Carl Icahn. The stock has also held up well during the market correction.

Both Leucadia (LUK) and American Real Estate Partners (ARP) are well positioned cash rich companies and excellent management to take advantage of the current market situation in a cash-strapped environment.

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