Thursday, July 16, 2020

Jeff, Freeze!

Jefferies is a company I've had my eye on for a long time. But I've never owned a single share until this downturn caused a huge reduction in the share price. In my view, this represents a terrific opportunity.

It used to be known as Leucadia, and was known for compounding book value at good rates over a long period. But the last decade has not been as kind. The company has fallen from mythical status to also-ran in the market's eyes, due to a number of missteps resulting in lackluster returns.

But I think the stock has fallen too much now. The company now trades for just 2/3rds of tangible book value. For a lot of companies with assets tied up in machinery for which there is no market, this means very little. But a lot of Jefferies' balance sheet is liquid, and the company has been buying back its shares at a blistering pace.

One concern I have is the merchant banking portfolio, where Jefferies owns a number of minority stakes in illiquid securities. Some of these securities may suffer writedowns (or more importantly, they may be permanently impaired as a result of the pandemic), and with a levered balance sheet these losses can have a large effect on equity. However, I also think some of these may be worth more than stated, as it is much harder to write *up* securities than it is to write them down.

In any case, with the current margin of safety, I think this is an asymmetric bet on a fallen angel.

Author has a long position in shares of JEF

1 comment:

Anonymous said...

JEF is my sole remaining financial, and have been looking for interviews or analysis on how much leucadia culture remains. yes, some of the assets seem impossible to value as an outsider, but i like the flavor of some of the alternative exposures ; a forex platform, and even a gold miner.

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