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Stock Strategist

Eighteen Five-Star Stocks from World-Class Investors

We uncover gems in the public filings of Alleghany and Leucadia National.

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We think that investment companies can make great investments. Unlike most open-ended mutual funds, investment companies benefit from significant managerial ownership and a long-term time horizon that allows equity investments to benefit from the effects of compounding. What's more, owning shares in an investment company allows investors to profit from the investment acumen of some of the best money managers around--without the exorbitant fees of many mutual and hedge funds. 

While we regularly profile the investments of  Berkshire Hathaway  (BRK.B) and  Markel  (MKL), we also think many investors can benefit from learning about the portfolios of  Alleghany (Y) and  Leucadia National  (LUK). In addition, similar to the way many investors routinely pore over Warren Buffett's shareholder letters, we also recommend that investors review both Leucadia's shareholder letters and Alleghany's Web site for useful information on investing.

Unlike Berkshire and Markel, neither Leucadia nor Alleghany is an insurance company--although both have previously invested in the field, and Alleghany's recent acquisitions of several insurers suggest it may eventually more closely resemble Berkshire and Markel. Both firms, however, boast hallmarks of great investment firms. Managerial ownership is high, which aligns interests with the true interests of outside shareholders. Alleghany's managers own about 24% of its shares, while Leucadia's team owns about 25% of their firm. Both also aspire to make long-term investments at prices far below fair value, a historically successful strategy of which we heartily approve.

Alleghany: 'Hard Assets'
Since 1980, Alleghany's shares have climbed more than 2,600%--about a 14% compound annual return that we largely attribute to the company's impressive investment strategy. The firm aims to invest at a 50% discount to its estimate of a firm's fair value, although it will pay up to 66% of fair value for a high-quality company, then sell when the shares become fairly valued. Alleghany's managers primarily invest in businesses that they understand well enough to remain comfortable owning for long periods. Historically, the firm has had most success investing in financial services firms and "asset-intensive" operations like railroads, miners, and heavy industrials. Presently, Alleghany's largest investment is in railroad firm  Burlington Northern Santa Fe (BNI), and the firm also has more than 30% of its portfolio in energy stocks.

Leucadia National: Buy Cheap, Then Extract Value
Over the past 26 years, the team at Leucadia has assembled one of the best records in business. Leucadia shares have appreciated about 25% annually, far outpacing the 9.9% annual return of the S&P 500. Leucadia's team seeks to invest in complex or disheveled companies that provide products and services with low obsolescence risk. Such opportunities are frequently available at bargain prices. Leucadia then works to extract value by slashing costs and improving the consistency and quality of each company's products and services. In addition, many of these acquisitions come to Leucadia with sizable operating losses that management can use to shelter investment profits earned elsewhere. While the majority of Leucadia's investments are in private firms, it also frequently invests in public equities, having recently increased its stake in  Eastman Chemical (EMN), and also taken a position in  Lucent Technologies (LU).

Eighteen 5-Star Investment Ideas
We think there are two ways that investors can profit from studying Alleghany and Leucadia. We've uncovered 18 stocks in these firms' portfolios that currently boast Morningstar's 5-Star rating for stocks, which means that our analysts think that investors who purchase these stocks are likely to earn attractive long-term returns. We note that 17 of these stocks are from Alleghany, as Leucadia primarily invests in smaller-cap stocks that Morningstar doesn't cover.

As of Aug. 15, these 18 stocks had 5-stars ratings:  Alexander & Baldwin (ALEX),  American International Group (AIG),  Applied Materials (AMAT),  Autodesk (ADSK),  Belo Corp (BLC), Berkshire Hathaway,  Coca-Cola (KO),  Intel (INTC),  IBM (IBM),  Lucent (LU),  McClatchy (MNI),  Medtronic (MDT),  Microsoft  (MSFT),  Novartis (NVS),  3M (MMM),  Wal-Mart (WMT),  Washington Post (WPO), and  Weyerhauser (WY).

For investors who don't want to purchase all of these stocks, a simple investment in the shares of Alleghany and Leucadia could provide investors with exposure to all of these investments--as well as to the substantial private holdings--of these shrewdly run firms.

The Full Portfolios
Finally, here are Alleghany and Leucadia's full holdings, with each position ranked by its weight in the portfolio. We continue to note that in the case of  Leucadia, we have excluded the firm's private investments, which have a position in the portfolio that is more than 4 times larger than its public investments.

Alleghany Portfolio
61.15%  Burlington Northern (BNI)
6.13%   Anadarko Petroleum (APC)
5.83%   Devon Energy (DVN)
5.71%   Apache Corp (APA)
4.79%   Chevron Corp (CVX)
4.47%   ConocoPhillips (COP)
1.38%   Cimarex Energy (XEC)
0.93%   Magna International (MGA)
0.69%   Dominion Resources (D)
0.60%   Berkshire Hathaway (BRK.B)
0.41%   Fresh Del Monte (FDP)
0.33%   Schlumberger (SLB)
0.29%   Caterpillar (CAT)
0.25%   Wal-Mart Stores (WMT)
0.24%   Exxon Mobil (XOM)
0.23%   Fedex (FDX)
0.22%   Costco (COST)
0.21%   Procter & Gamble (PG)
0.21%   Eli Lilly (LLY)
0.21%   Microsoft (MSFT)
0.21%   Applera Corp (ABI)
0.21%   3M (MMM)
0.19%   Chubb Corp (CB)
0.19%   Nordstrom (JWN)
0.18%   Medtronic (MDT)
0.18%   Noble Energy (NBL)
0.18%   AT&T (T)
0.17%   Walt Disney (DIS)
0.17%   Novartis (NVS)
0.17%   News Corp (NWS)
0.17%   American Express (AXP)
0.17%   Intel Corp (INTC)
0.17%   Manpower (MAN)
0.16%   Millipore (MIL)
0.16%   Deere (DE)
0.16%   Du Pont (DD)
0.16%   Weyehauser (WY)
0.16%   Boeing (BA)
0.15%   AIG (AIG)
0.14%   Sony Corp (SNE)
0.14%   Sigam Aldrich (SIAL)
0.14%   Wachovia Bancorp (WB)
0.14%   Coca-Cola (KO)
0.13%   Autodesk (ADSK)
0.13%   Lincoln National (LNC)
0.13%   General Electric (GE)
0.12%   Estee Lauder (EL)
0.12%   Liberty Media (LINTA)
0.12%   IBM (IBM)
0.11%   Alexander & Baldwin (ALEX)
0.11%   State Street Corp (STT)
0.10%   Applied Materials (AMAT)
0.10%   McClatchy Co. (MNI)
0.10%   Dow Chemical (DOW)
0.10%   Belo Corp (BLC)
0.10%   Fifth Third (FITB)
0.09%   Univision Communications (UVN)
0.08%   Texas Instruments (TXN)
0.08%   Intuit (INTU)
0.08%   Washington Post (WPO)
0.03%   Ameriprise Financial (AMP)
0.02%   Discovery Holding (DISCA)

Leucadia Portfolio
53.52% Eastman Chemical (EMN)
39.17% Home Fed (HOFD)
5.64%   International Assets Holding Corp (IAAC)
1.07%   Parkervision (PRKR)
0.15%   Veeco Instruments (VECO)
0.15%   FEI Corp. (FEIC)
0.13%   Lucent Technologies (LU)
0.12%   Symyx Technologies (SMMX)
0.06%   Accelrys (ACCL)

Justin Fuller has a position in the following securities mentioned above: MSFT, MDT. Find out about Morningstar’s editorial policies.