“Brigham St. Society — secret society #1”

By Travis Johnson, Stock Gumshoe, October 4, 2007

This is a follow-up to our look at the “Pasadena Secret Investment Society,” which teased us with five other holding companies that the Porter Stansberry Investment Advisory thinks are great investments.

In the words of Stansberry & Associates, “If you’d like to make a small fortune in America today, we believe the only safe and easy way to do it is to invest in these 5 opportunities that I call ‘Secret Societies.'”

Whether or not that’s true, or the real reasons why Porter believes it to be true, that you’ll have to get from them — I think it’s about $75 a year for the subscription.

But if you just want the names of these investments so you can check them out on your own dime, well, you’ve come to the right place. The Gumshoe is happy to oblige (or at least, try to oblige … we’ll see if we make it through all five).

The first one of these societies is called (by Stansberry, probably not by anyone else) the Brigham Street Society.

Why’s that? Well, they’re apparently housed in a mansion on Brigham St. in Salt Lake City, UT.

They were founded by two Harvard Business School grads in 1978, and are famously secretive .. though they’ve got a lot to crow about, with, as reported by Stansberry, a 32% annual return. That beats Buffett handily, though over a considerably shorter period of time.

They’ve had 808% gains over the past ten years. OK, that’s pretty good, too.

And finally, a more interesting clue: “The ‘Brigham St. Society’ focuses on debt convertibles, bankruptcies, spin-offs, and other sophisticated strategies… Plus, they own wineries, casinos, timberland, and banks.”

OK, so with that collection of investments, and accounting for the fact that this corporation is among the more publicity-shy in the world, this just about has to be ….

Leucadia Corp (LUK)

I don’t even know why these guys bother having a public company — I doubt they need the hassle of filing anymore, and they have the only corporate website I’ve ever seen that makes Berkshire Hathaway’s look flashy — all you’ll find is their SEC filings and, in Buffett fashion, the letters from the Chairman and President (Ian Cumming and Joseph Steinberg, the two Harvard grads in question).

I’ve actually held shares in Leucadia in the past, though I don’t currently. They are quite frequently overlooked because they try very hard to be overlooked, but though they don’t have quite the overwhelming cash generation machine that Berkshire has in Geico and their other insurance operations, they do have a fascinating mix of businesses and have been, many times, referred to as the “next Berkshire.”

Unlike Berkshire, which has had a good year, Leucadia has had a spectacular year — their shares have nearly doubled since January. Aside from making me gnash my teeth, since I sold quite a while ago, that means they look pretty pricey based on current reported earnings — the PE is 95. A bit steep for a bunch of real estate, some wineries, an odd telecom company — perhaps it has helped that they also own a bunch of copper mining and oil drilling holdings, and the Hard Rock Cafe Casino in Biloxi that was recently rebuilt (and had to be built twice before opening, thanks to Katrina).

Oh, and in case you’re curious about that “Brigham St.” business, and note that the Salt Lake address for Leucadia is actually “South Temple St.”, have no fear — S. Temple has often been popularly referred to as “Brigham St.” in Salt Lake for a long time, an honorific for, of course, everyone’s favorite football factory founder, Brigham Young (just kidding).

But of course, LUK doesn’t care so much about the earnings they report, the consistency of reported earnings, or how much people like them — they care about growing their book value over time and making money without getting noticed. This is pretty clear from the first page of their letters to shareholders every year — it’s just a chart of the growth in book value of Leucadia shares, much like Buffett’s letters (and LUK’s letters are great, too, if you enjoy Warren’s you might like these as well — they can provide some good insight into the minds of a couple brilliant investors).

And just a quick note on their annual returns — the growth in book value has indeed been spectacular, at about 32% annual compound growth … but they started off with an odd year in 1978, so if you start from 1979 the compound annual returns have been a much more Buffett-like 25%. Still nothign to sneeze at.

Barron’s did notice them back in August, which helped boost the shares when they mentinoed LUK as one of the possible beneficiaries of the credit squeeze — companies like Leucadia and Berkshire that have big cash hoards, the theory goes, can swoop down and buy up debt and equity cheap when the market panics.

I have no idea whether or not they did so. I would say that LUK has had fairly consistent growth without getting much attention, but that they have definitely gotten some attention this year, and the shares may well be worthwhile but are not cheap. Using their metric, LUK is trading at about 2.5X book value now … that compares with more like 1.6X book for Berkshire. LUK does, unlike Berkshire, pay a dividend, though it’s so small as to be negligible.

So, I’ve got nothing bad to say about LUK, other than the fact that I liked it more at $25 than at $50 — and I suspect I won’t have much negative to say about any of these successful holding companies we’re going to look at for this teaser (assuming I can figure the other four out when I get to them). The only qualm I have, for active investors who like to know what’s happening to their money, is that you’ll have to be satisfied with a pretty tight-lipped management team, and at this valuation you’ll need to have a fair amount of faith that they will be able to continue their outsize investment performance.

And I’m willing to bet, without even having looked for the others yet, that this is by far the most secretive of Stansberry’s “secret societies.”

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October 15, 2007 9:44 pm

Great job, Gumshoe!