A favorite strategy among investors is to look and see what Warren Buffett and Berkshire Hathaway (NYSE: BRK-B) are buying. After all, if the Oracle of Omaha is buying a company’s stock, chances are it’s a great value.

#-ad_banner-#Well, one of the most underrated stocks is “baby Berkshire” Leucadia National Corp. (NYSE: LUK), which, like Berkshire, is a diversified holding company that’s run by a great stock picker — in Leucadia’s case, CEO Richard Handler.

Handler is a great stock picker. He has built a company with interests in investment banking, meat processing, real estate lending, auto dealerships, liquefied natural gas and other publicly traded companies.

Thanks to the fact that Leucadia must disclose its investments, we get to peek at what Handler and Leucadia are buying. 

One company that Leucadia is buying is Harbinger Group (NYSE: HRG), another diversified conglomerate. It has been growing its business by acquiring and growing businesses that generate substantial free cash flow. Leucadia is one of Harbinger Group’s largest shareholders with a 12% stake. 

Besides Leucadia, billionaires Michael Dell and Leon Cooperman have stakes in Harbinger Group, owning 4.5% and 8.3%, respectively. 

Looking Past Harbinger’s CEO Debacle
Last year, the SEC imposed a five-year ban on Harbinger CEO Philip Falcone from the securities industry. The SEC accused Falcone of various infractions, including using investor money to pay personal taxes and giving favorable treatment to certain investors. He paid an $18 million fine, but managed to keep control of Harbinger. 

It’s reported that Falcone made some $1.7 billion for himself, while also raking in billions more for Harbinger investors, by shorting the subprime market in 2007. His Harbinger has been called a “mini Berkshire Hathaway” by Forbes.

The Harbinger Model 
Harbinger controls Spectrum Brands Holdings (NYSE: SPB), which owns a variety of brands, including Rayovac, Remington, Black & Decker, George Foreman grills, Toastmaster, Farberware and several others. Harbinger’s stake in Spectrum is worth over $2.5 billion, which is more than Harbinger’s own market cap of $1.85 billion.

Harbinger’s portfolio also includes Fidelity & Guaranty Life (NYSE: FGL), Salus Capital Partners, EICapital, and FrontStreet Re, a partnership with Exco Resources (NYSE: XCO).

Fidelity & Guaranty Life sells fixed-indexed annuities, which are targeted at retirees. Its products offer payouts tied to the stock market with a limited risk of losses. The insurer is run by former MetLife (NYSE: MET) executive Lee Launer, so there’s a lot of experience at the top. Fidelity & Guaranty Life also invests in loans originated by Salus Capital Partners, a middle-market lender that happens to be another Harbinger company.

Fidelity & Guaranty Life is also an example of Falcone’s deal-making abilities. He purchased the insurer from Old Mutual for $350 million in 2011. After taking the company public last year, it has a current market cap of $1.4 billion.

Harbinger is looking to add to its portfolio, and recently offered to buy retailer Central Garden & Pet Co. (Nasdaq: CENT) for about $1.1 billion. Central Garden & Pet has two divisions: lawn and garden, and pet supplies. If Central Garden & Pet does not agree to sell the entire company to Harbinger, Falcone has proposed acquiring just the pet supply business for $750 million.

Risks to Consider: Harbinger carries a high debt load, with debt that’s nearly three times its market cap. That could affect its ability to acquire more businesses and force it to sell some of its holdings if it becomes strapped for cash. 

Action to Take –> Harbinger looks to be a solid sum-of-the-parts story. My price target is $20, which represents upside of better than 50%.