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Leucadia: The "Little Berkshire"
03/26/2004 12:00 am EST
How can you play rising rates?
Marilyn Cohen, president of Envision Capital and columnist with the prestigious Forbes magazine says, "When the Fed tightens–and it will–don’t bail out of bonds. Think junk on the mend, such as Leucadia, the 'little Berkshire'." "With interest rates not far above the
rock bottom, bond portfolios did fairly well last year. Junk bonds did
particularly well. It won't last. Rates can't stay this low for much longer. A
1% Federal funds rate is too low for an economy growing at a 4% annual clip. And
even before the Fed tightens, a new generation of bond vigilantes will begin
work. Result: weak bond prices.
"This gathering storm, however, doesn't
mean you should abandon bonds. There are still some wise moves to make. In junk
the sweet spot is at the high end of the credit quality spectrum. Go for
corporates that stand a good chance of getting an upgrade to investment quality
(meaning BBB or better). Near this borderline between junk and investment grade
you can pick up almost a three-point yield spread over Treasuries, meaning a
ten-year corporate will yield close to 7%. Look for issuers with improving
business performance and with balance sheets that have already benefited from
lower rates.
"A good example is Leucadia National (LUK NYSE), known
as ‘the little Berkshire Hathaway' ’for its potpourri of businesses–banking, winemaking, insurance, mining. Run by the same consistent
management team for years, profitable Leucadia has a long history of integrating
new acquisitions. With an improving economy, earnings will continue to advance.
This borrower is right on the borderline, with a split rating: Moody's rates its
bonds Ba1, or high-grade junk, while Standard & Poor's rates them BBB-, the
lowest investment-grade rating. Two issues interest me, the Leucadia
National 7.75% and 7.0% coupons both maturing Aug. 15, 2013. The 7s,
issued last year, are priced at 103 to yield 6.6% to maturity. The 7.75s, issued
in 1993, are priced at 106 to yield 6.9%. And get this: Both are noncallable.
Despite Moody's rating, I think your principal is
safe."