Loews (L): Buying value assets at a discount

"I believe this understates its current value. So Loews is trading at a whopping 38% discount to its NAV. (It is also trading at a low 7 times earnings, though I view Loews as an asset play not an earnings or yield vehicle.)

"However, the public companies and the cash-both assets for which valuations are readily available-amount to about 60% of the total Net Asset Value. Add up these values, and Lowes is trading at a discount of 25% to the value of just the public shares and its cash.

"That's undervalued enough, while the rest of the company-the private companies and its investment portfolio-comes free. You might argue with the valuations I place on these private businesses, but we know they are worth something!

"In many ways, the specific assets they currently own are much less important than the company's style. Let's look at those assets, though, since that's what creates the tremendous value opportunity right now, the ability to buy Ben Graham's proverbial dollar bill for 50 cents.

"The five main assets are all cheap. They are a majority ownership in three public companies, plus two significant private companies. These are:

* Diamond Offshore, the offshore drilling company, of which Loews owns 51%
* Boardwalk Pipelines, which controls 10% of the country's gas shipments; Loews owns 75%
* CNA Insurance, the troubled diversified insurance company, 90% Loews-owned
* HighMount, a cash-flowing group of natural-gas wells bought recently from Dominion
* Loews Hotels, the collection of high-end hotels in North American cities.

"These are listed in terms of the value to Loews, with Diamond Offshore representing about 26% of the total assets, with BWP and CNA approximately 20% and 17% respectively. (Of course, these percentages would be lower if one uses less conservative valuations on the private companies.)

"In addition, Loews has approximately $3.5 billion in net cash (following the successful sales of its interest in Lorillard tobacco), approximately $8 per share. The reason to like Loews, however, is not just its current value.

"In addition, you are buying some of the smartest (though modest and private) value investors around, investors who have been consistently successful at buying assets cheaply and successfully selling them.

"With a cash hoard-and cash flow of approximately $200 million a quarter-Lowes is in a superb position to acquire quality assets at low prices in coming months.

"During the boom times, they consistently brushed off the urging of analysts to 'spend the money and lever up', and they continue to demonstrate that same patience and discipline in the decline.

"So what's wrong and why the discount? Well, conglomerates like Loews tend to trade at discounts to NAV, though the current nearly 40% discount is extreme.

"Because it is a collection of diverse assets, and assets that change over time, there are very few analysts who follow Loews. In recent years, most of the analysts following the company were, in fact, tobacco analysts, interested only in its Lorillard holding, for example.

"We don't see any rational reason for Loews to be so undervalued. So let's buy some great assets, top management, a proven track record, and a pile of cash, all at a 40% discount to its value: buy Loews Corp. This will go into the conservative part of our portfolio."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.