How to Feast with the Vultures

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Leucadia trades at 46, and Morningstar analyst Ryan Lentell is in the process of revising his fair-value estimate of 39 upward. "If you're going to buy and hold for a long time, you'll do well," he says. Since 1979 the stock price has appreciated a compounded 25% a year, on average.

WHITE MOUNTAINS INSURANCE

White Mountains Insurance Group (WTM) in Hanover, N.H., buys troubled insurers and then engineers turnarounds. The insurance properties throw off cash White Mountains can use to finance acquisitions. But when markets get frothy, management hoards cash rather than risk overpaying. "Intellectually, we really don't care much about leaving our capital lying fallow for years," the company says on its Web site. "Better to...wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we just all went to play golf."

With insurance experts, including Buffett, predicting an industrywide profit decline this year, White Mountains's stock is down 6% since Jan. 1. It trades at 476, a hair above its per-share book value (assets minus liabilities), a measure often used to value financial-services firms. Consistent with Buffett's outlook on insurance, Berkshire Hathaway recently sold its 16% stake in the company. CEO Raymond Barrette cited the growing rivalry between the firms. Other value investors see an upside: Shareholders include Mutual Beacon Fund. Morningstar analyst Jim Ryan estimates fair value at 625.

ALLEGHANY

Like many in the deep-value camp, Alleghany (Y) shuns publicity. It doesn't hold quarterly conference calls. Wall Street coverage of the New York company is virtually nonexistent, in part because with lots of cash and little debt, it doesn't often hire investment bankers. Alleghany, which focuses on insurance, also has seen its shares beaten down. That has attracted bargain hunters at fund companies Franklin Mutual Advisers and Royce & Associates. At 342 a share, the stock, up an average 20% a year over five years, trades at a hefty discount to its 518 fair value, Ryan figures.

Alleghany, founded as a railroad holding company in 1929, also owns a portfolio of stocks and bonds. A big winner: Burlington Northern Santa Fe Railway (BNI), on which it has earned over 500% since 1994. Recently, Alleghany bet successfully on energy stocks, which comprise 32% of its equity portfolio.

PICO HOLDINGS (PICO)

Small-cap PICO started out as a medical-liability insurer in 1981. Now about 70% of assets are in the rights to underground aquifers and other water resources in Southwestern states. "It's one of the better water-asset plays," says Jesse Herrick, who follows alternative-energy technologies for San Francisco institutional broker Merriman Curhan Ford (MERR). PICO also has a portfolio of big-stakes investments that enable it to play a role in management. They include 23% of Jungfraubahn Holding, a railway in the Swiss Alps.

In the 14 years that current management has been at the helm, the stock has delivered compounded average annual gains of 18%—more than twice that of the Standard & Poor's 500-stock index. But housing woes have raised concerns about water demand, sending the La Jolla (Calif.) company's shares down 7% this year, to 31, just above its book value of 27. Herrick puts fair value at 62 to 67.

BROOKFIELD ASSET MANAGEMENT

Over the past five years, Toronto's Brookfield has transformed itself from a wide-ranging conglomerate into a company largely focused on real estate, power, and infrastructure properties. Those include prime London office buildings, millions of acres of timber, and hydropower generating plants around the world. The rationale? Such assets generate steady returns and last a long time without requiring large ongoing investments.

Managing partner J. Bruce Flatt recently invited institutional investors such as pension funds to invest alongside Brookfield. In return for managing the money, Brookfield pockets a small annual fee. The stock, up an average 36% a year since Flatt took over in 2002, has pulled back, partly on concerns about real estate. At 27, it trades below Morningstar's 34 fair-value estimate. Among the shareholders betting on Flatt: vulture Martin Whitman of Third Avenue Value Funds.

Tergesen is an associate editor for BusinessWeek in New York .