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Buy American --- And Short Japan Is Julian Robertson's Strategy
21 December 1987
(c) 1987 Dow Jones & Company, Inc.

TIGER is the name of Julian Robertson's main
hedge fund. Right now, it's a wounded tiger; its
major shorts were in the Japanese market when
the October massacre hit everyplace else worse.
So, he says with no little chagrin, it
underperformed.
But Robertson, a canny veteran of 30 years in
Wall Street, and one of its more successful
money managers, is undaunted. Indeed, sensing
a surfeit of gloom among investors, he's been
scaling back his shorts -- except in Japan -- and
adding to his long positions. He's still convinced
that there'll be a substantial downward
realignment of valuations in Japan -- he hopes
slowly, but probably in a panic. Either way, he
says, that will signal a great buying opportunity
in this market and others -- and he isn't waiting
for any bell to ring to prepare for it.
Julian did some grumbling about a dearth of
good shorts when we talked with him the other
day, but mostly, this Q&A records his thinking
on what, today, look like good buys.
-- Kathryn M. Welling
BARRON'S: Julian, you spent quite a few
years at Kidder Peabody before striking out
on your own, didn't you?
Robertson: I really worked there all my life
until I started this fund. I started there in '57 and
actually left in 1978 to take a sabbatical.
Q: A sabbatical?
I took the kids and all and did kind of a middle-
age hippie dropout to New Zealand. But I was
sort of still with Kidder. They wanted me to
stay, and I didn't formally resign until Dec. 31,
1979.
Q: And over that long stretch at Kidder
you
I was a salesman there and became a
stockholder, I guess, in about '66. I became a
director eventually and then took over the
investment advisory department in 1974.
Q: But you left Kidder too soon to get a cut of
General Electric's money?
That's right. It was tragic.
Q: Oh, well, from all reports you haven't
done too badly.
It's worked out all right.
Q: So, you went into business for yourself
when you dropped back in from New Zealand
at the end of 1979?
We really didn't get the fund under way until
about May of 1980. It took that long to get the
clients and the legal aspects of it going.
Q: You're talking now about "Tiger," your
hedge fund, right?
That's right. By now, we've also got several
other funds. Jaguar, which was started in
September of 1980, and then later on, Jaguar
N.V. and Puma. They're all investment
partnerships that, you know, go short. But there
are big differences in them. Altogether, we're
running $315 million, something like that.
Q: What are the differences among your
hedge funds?
Tiger is really mainly for the American
individual. Jaguar, the way it's set up, is
primarily for eleemosynary institutions and

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pension funds, tax-free type things. Jaguar N.V.
is, of course, for foreign investors. And Puma
has a four-year lockup -- no one can get in or get
out for four years. It also has a layer of insurance
company debt on top of its equity capital
structure.
Q: So it's a real high-wire act.
Well, not really. We are hedging the debt.
Q: We have to ask. Why this thing about
exotic cats? Are you a big game hunter?
Not at all. I've always had the habit of calling
people "Tiger" when I didn't know who they
were. Rather than call them "Fellow" or
something, I'd just say, "Tiger." And when we
were trying to find a name for the fund, my son
said, "What about Tiger?" He was about seven at
the time, and we picked it.
Q: And Jaguar and Puma just followed?
That's right.
Q: And the firm now consists of you and..?
Well, there are about 16 of us. But in terms of,
really, the management of the money, there are
five of us.
Q: How did your hedge funds do in the
crash?
I would love to say we did as well as we thought
we would have. We did not. That was for a
variety of reasons. We had thought the break
would come in Japan first.
Q: You weren't alone there.
Yes. It did not, and that hurt us. Those shorts
actually did relatively poorly. And we were in a
lot of smaller companies and our leverage hurt
us, too.
Q: In what sense?
The leverage hurt us in the fact that we wanted
to cut down on our leverage. Now let me explain
to you what I mean by leverage. Many times,
we've run our fund, in terms of equity, 200%
long and 100% short. That's a little bit extreme.
Let's say, 175% long and 75% short. Now, that
gives us an exposure of 100%, but it gives us
heavy leverage. We had to cut back not only our
exposure, but also our leverage after Oct. 19.
Q: You had margin calls, in other words?
Maybe not margin calls, but we lost money. One
side of the hedge didn't work. All that hurt us.
So we did not come out of it as well as we
thought. We'd always thought that, if we ever
had a bad period relative to the market, it would
be in a distinctly up market, but it so happened
we got hit this time in a bad market. I would say
that we probably came out better, from what we
can gather, than most of the other larger hedge
fund players that we know about during that
break. But we were disappointed at how poorly
we did.
Q: You actually did worse than the market?
Yes. And we certainly had expected to do better,
relative to the market.
Q: What's your market view now?
We've made the point, over the years, that we
are more stock pickers than market judges. I
really feel like that is our forte. We don't make
big market bets. Having said that, I'm having a
very difficult time finding shorts at the present
time. A very hard time. And, No. 2, I find a great
plethora of people expressing bearish opinions
on the market. I was writing a memo to my
partners today, which I haven't sent out yet, that
I think I'm going to end with this statement:
"There are so few bulls that I can't imagine
who's going to impregnate the cows." And I
really mean that. I just don't see anybody bullish
around at all.


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Q: Gee, we're hearing from a lot of fund
managers and such who believe, or at least
hope, we've just had a hiccup in the bull
market and, in fact, that it will be back to the
races soon.
Is that right? I'm disappointed to hear that
because I really like to hold the minority point of
view. I want there to be a lot of bearish opinions,
because the more bears there are around, the
better things will be. And I just don't find
anybody who isn't pretty bearish. I mean, you
don't find many people that are fully invested.
Yet, there are an awful lot of companies that are
going to do awfully well over the next couple of
years, unless we go into one lulu of a recession.
Q: Well, it was one lulu of a market break. It
might be predicting a recession.
No, I don't think that is the case. I don't see
there's any reason to think that. Only about 15%-
20% of the population realizes that they are
affected by a break like that. The rest of the
people really don't realize that they are affected.
Of course, they are, through pension funds,
profit sharing and all that. But their main store of
value is their home which -- with the lower rates
brought on by the break -- presumably is worth
more.
Q: Sure. But companies' spending plans are
also likely to be affected by the crash.
I don't talk to anybody in industrial America
who isn't absolutely tonning it. I'm talking about
smokestack America. They are making a
fortune. I don't think our smokestack companies
have ever been this competitive in the last 25
years.
Q: But suppose the dollar stops declining?
It doesn't have to go any lower. We're already
very competitive. I mean, take your producers of
polyvinyl chloride. It's in extremely short
supply. I talked to one of our partners today,
who is a producer of plastic products. He could
produce 40% more, if he could get the polyvinyl
chloride. He can't get it; it's on allocation. And
the best thing about it, from the point of view of
the polyvinyl chloride producers, is that the price
still isn't high enough to justify building new
plants. So this situation is going to remain for
three or four years. I mean, almost unbelievable
profits. And American companies are lucky to
get the polyvinyl chloride from the producers
because they could export it at even higher
prices.
Q: Are we to take it, then, that you're a
natural bear who finds himself in the
somewhat awkward position of viewing things
bullishly?
No, I'm not really ordinarily a bear. But I find
myself in the position of finding some
companies that are such compelling buys that I
have to own them now. I also find myself
worrying about several things.
Q: Such as?
One, how is this deficit situation going to be
resolved, both the trade and the budget deficits?
And of more importance, how will the ultimate
break in the Japanese market affect us? Those
are serious questions that should give anyone
pause. Another reason that I'm not completely
bullish is that, normally, when you have a break
like that, the market eventually falls to a point
where clearly stocks are much more attractive in
price than fixed income instruments. And that
has not happened. That's a much more valid
concern than the twin deficits.
Q: Yet you see the economy and the market
doing okay?
Yes. But the risks are there. The Japanese
market is absurdly overvalued. I mean, you have
a company like Nippon Telephone & Telegraph.
The Japanese government just sold the public
part of it, in effect, to reduce its deficit. They
sold $36 billion worth. Bear in mind, a big deal
here is $1 billion and that was a Citicorp deal.
And I'll bet you we haven't sold $1 billion worth
of equities here since Oct. 19, in toto.

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Q: Of course, we don't have the Japanese
equivalent of the Avon lady selling stocks to
housewives.
They can do that and they have done that. And
the Japanese government and the Japanese
securities firms and all are kind of in league to
keep this thing going. But NTT stock is at 250
times earnings; the company is growing at 5%-
10% a year.
Q: Just a little overvalued, you mean?
A better example, where you can really see the
similarity, is Japan Airlines and American
Airlines. Japan Airlines, actually, from an
operating basis, loses a little bit of money. It's a
very high-cost airline. Yet the Japanese
government just sold, I don't know, $5 billion or
$6 billion worth of JAL stock to the Japanese
public at a price that was six times book and
infinity times operating earnings. American,
which is a lower-cost producer, sells at two-
thirds of book or three-quarters of book and at
7.5 times earnings. It just doesn't make sense to
me. There's never been one of these things that's
succeeded.
Q: You mean . . .
I mean one of these sort of overvaluations, sort
of cartels, market bubbles, that hasn't finally
broken. The latest one was in Kuwait. And this
one will break, too.
Q: You don't buy the argument that the
Japanese, and the Japanese stock market, are
simply different and they'll manage to keep
the market from falling apart?
You can't do it. Particularly as it goes higher and
higher and higher. There have been a couple of
interesting indications of that recently.
Q: Like what?
Nobody in Japan believed -- even the bears on
the Japanese market -- that in the absence of a
crash, NTT would go down after the offering.
Because there is a concerted effort by the
brokers, by the government and by everybody,
to keep these stocks up. But NTT is down. I
believe that will be a psychological problem that
even the Avon ladies will have a hard time
overcoming. It's a very -- it's going to be a very,
very interesting period to watch.
Q: If the bubble bursts, what do you think
will happen to the Japanese money in
Treasuries?
That's the problem. I don't know that they would
jerk it out, but they would certainly not be
available to buy at the next quarterly refunding.
That would probably really hurt the bond market
and that would have some carryover into stocks.
Q: You're talking about a crash of some
major proportions in Tokyo?
It's certainly possible. I don't know when, but it
will eventually happen, either slowly or with
maybe a 30% or 40% break. And I can't see how
a crash in Japan can be anything but very bearish
for markets all over the world. That will be sort
of the last straw.
Q: Meaning?
That's when I'll get very bullish. Once the yen
quits climbing and the dollar bottoms out, the
Japanese will put a lot more money in the U.S.
because the value of what you can get here is
just so much more than what you can get in
Japan, whether in real estate, stocks, or what
have you.
Q: Wait a minute, you're saying that, after a
crash, the Japanese will say, "Well, we just
got beaten up here, so let's go looking
overseas?"
They're already overseas. They've bought a lot
of stuff in New York and they've bought an
enormous amount in Hawaii. The yen buys so
much more value here. I can't believe that
rational people with security analysis
backgrounds wouldn't see that there are much
better values outside of Japan. And today, you
have to look globally to invest.

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Q: But who's rational in the aftermath of a
crash? And besides, after a crash there will be
more relative values available in Tokyo.
That is true. I would think also the government
would impose some capital restrictions. But
there's a lot of money already outside of the
country, some of which will remain outside.
Q: At any rate, while waiting for Japan to
crack, you're buying U.S. stocks?
Yes. After that crash, things will be ready to
buy. And I'm not waiting for that to happen
before we are at least reasonably well-invested.
Q: How fully invested are your funds?
We are currently, overall, probably 70%
invested. I mean, exposed to the market. We
don't see really a whole lot of risk in polyvinyl
chloride producers selling at six times next
year's earnings, with earnings improvements
almost guaranteed for the next three years. I
can't imagine Ford Motor Co. not being a value.
Q: Suppose car sales drop off a recessionary
cliff?
Regardless, if you could shrink that thing by
60%, every leveraged buyout company in the
world would be looking at it. I mean, you could
pay, say, $77 a share for it and get $35 in cash.
Your earnings are somewhere between $18 and
$20 a share and, even if sales fall off by 15%,
you probably still have got the thing earning $12
next year.
Q: But, overall, you're short Japan and long
cyclicals?
Japan is practically the only place where we can
find good shorts now.
Q: So you're how long now?
It probably boils down to maybe 110% long,
40% short.
Q: When you get really bullish, what will that
go to?
We'd rarely get over 100%-105% long, on a net
basis. But we could run more leverage. In other
words, we'd be 150% long, 50% short. Or even
170%-70% because we think we hedge better.
Then, of course, you can run into trouble on that
when part of your hedge is something like Japan,
which doesn't work.
Q: What are you short in the way of U.S.
stocks?
One of the shorts I have now, I really hate being
short. It's a supermarket down in Jacksonville,
Fla., Winn-Dixie Stores. The people who run it
are terrifically wonderful people, but they're a
pretty high-cost distributor and some low-cost
distributors are going into their area.
Q: Who specifically?
I'm thinking of Food lion. It's just an
unbelievable company, though. Bruno's has also
hit in some points, too. But Food Lion is the one
that really hits Winn-Dixie.
Q: With price wars and such?
Exactly. They haven't shown any real margin
growth in the last three or four years anyway.
The stock sells at a big multiple. But you hate to
bet against a company that has really decent
people running it, and that's true of this
company.
Q: That sounds like you, of all people, almost
subscribe to the notion that short selling is
evil and un-American, to boot.
No, I don't feel that way at all. But generally
speaking, when you get an ideal short, you find
you'd rather have it be . . .



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Q: a fraud?
Those are mostly small companies. But you'd at
least like to see bad people, with all the trends
heading down.
Q: Good people might just be resourceful
enough to pull off a recovery?
That's right. But facing competition from these
other guys, I just don't think Winn-Dixie can.
They haven't really shown they could over the
last three or four years.
Q: What are you shorting in Japan?
Well, we love our Japan Airlines shorts, which
we talked about. I don't want to talk about the
others -- you could almost throw a dart.
Q: Why not talk specifics?
Because over there, it is almost -- it's just like
one of my guys said, "Wouldn't they just think
we were the worst people in the world? Here
they are, trying to exert their control and
everything and here's somebody selling their
stocks short." So I'd rather not give you any
specifics over there.
Q: How about other shorts here, then?
Let me see, we're closing out a lot of shorts in
Texas Air.
Q: You think it's going to stay in the air?
Well, {Texas Air Chairman Frank} Lorenzo has
made such good agreements. See, Eastern and
Continental can both go broke, and it doesn't
come back to hit Texas Air. It would be an off-
balance-sheet thing.
Q: Seriously?
Yes. It's very clever, the way he did that. He's a
wonderful financier. He's just a terrible airline
operator. As I said, it's pretty hard to find good
shorts.
Q: Evidently. What are you buying?
As you could gather, I'm wild about Ford.
Q: What do you drive, yourself?
I drive a Mercury that I'm crazy about, and my
wife has a Lincoln. How's that? We will not
have any foreign cars.
Q: Not even a Jaguar?
No.
Q: What else are you buying?
I love the paper stocks, in particular, Jefferson
Smurfit.
Q: A great name. Paper stocks had a heck of
a move earlier this year
This one has a gorgeous move. It's been a
wonderful stock, but the company is beautifully
run. They've made some wonderful acquisitions.
Michael Smurfit, the head, is a very driven man.
He wants success, I think, in part to sort of push
his father's name. But, anyway, he has really
done a lot.
Q: In what way?
He bought Container Corp. from Mobil. That
was one of the great acquisitions of all time.
They turned it around almost immediately. And
they've made a lot of wonderful acquisitions
over the years. It's a very well-run company.
Q: What kind of earnings is it producing?
Smurfit can earn $6 or $7 next year. The stock is
around 45.
Q: Are you buying other papers?
We are also buying West Frezer Timber Co.,
which is a jewel of a company.


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Q: West Frezer?
Up in Vancouver. It sells at about 4 1/2 times
earnings and, besides being a very low-cost
lumber company, has enormous pulp and paper
earnings.
Q: Where does that trade?
Toronto.
Q: At what price?
It's now selling around $18, Canadian, and it
will probably earn $3.75 this year and
somewhere north of $4 next. And to go back, in
Jefferson Smurfit's case, they may buy out some
of their partners in joint ventures. And if they
do, their earnings will go up very significantly.
Q: Are you also buying the plastics companies
you mentioned?
I'm very high on two PVC companies, Georgia
Gulf and Vista Chemical, which we own.
Q: Isn't Vista a spinoff from something?
U.S. Steel, probably about a year ago.
Q: And both stocks are buys at current
prices?
Yes, very much so.
Q: What are your earnings estimates?
Georgia Gulf will earn between $7 and $8 next
year, and Vista will earn $5.75.
Q: They're trading at what kind of multiples?
Georgia Gulf shares are changing hands around
$46 and Vista is $40.


Q: What do their balance sheets look like?
Georgia Gulf has virtually no debt. Vista has
quite a bit of debt, but if you look out another
year and a half, and if you assume things go the
way they're going now, it will be perfectly all
right. Vista will be totally out of debt pretty
quickly, well before we get additions to
capacity, assuming we don't see some
tremendous deterioration in demand for plastic.
Q: What else are you long?
Well, I like some of the financial stocks. They're
so very reasonably priced. We own Dreyfus. . . .
Q: It's certainly more reasonably priced than
it was a while back.
Dreyfus, at 24, is probably selling now at, oh,
less than 10 times next year's earnings. It has
almost no capital requirements. I'd venture to
say that, had Dreyfus jumped in and converted
into a master limited partnership, then Dreyfus
would have probably been earning $3.50-$4 next
year, paying out $3.50, and the stock could
easily have been selling between $35 and $40 on
a yield basis. But even so, Dreyfus is an
incredibly reasonably priced value at this level.
Q: Suppose we're in for a really nasty -- and
long-lived -- bear market. Who's going to buy
mutual funds?
That's what the big thing about Dreyfus is -- so
much of Dreyfus is really a money fund. That's
really the lion's share of their assets.
Q: No pun intended, we're sure.
No pun? Oh, Dreyfus, lion. But money funds are
really a great part of its business.
Q: You're saying that money is likely to stay
there rather than go into stocks or bonds?
Yes, particularly if rates go up, and more would
move over there very quickly. And if you do
believe we're going to have inflation, then rates
will go up. It's all a question of when. In the

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meantime, they're doing very well. There will be
nice earnings increases this year and next.
Q: What other financial stocks are you
buying?
I'm very fond of Marsh & McLennan. It sells a
product that everybody has to have, i.e.,
insurance. It takes no underwriting risk on it.
And it's selling at lower than a market multiple.
The stock is very, very cheap, at about 10 times
next year's earnings of, say, $4.50.
Q: Insurance brokers, as a group, are only
scraping along.
Marsh Mac is really well-respected in the
industry. They require no capital. There's no
reason in the world why they don't buy back
their own stock. The only really big mistake the
company has made in the last -- I don't know
how long -- was when one of their people over-
invested in the bond market and they had to take
a big writeoff.
Q: Do you own any banks or brokers?
I own something that nobody likes, Morgan
Stanley.
Q: And you'll admit it?
Ever since I've been in this business, anybody
who was tapped to be a partner at Morgan
Stanley knew that he had his future made. Now,
we can all buy shares of Morgan Stanley at
book, which is what the partners could do. We're
paying a big fat five times earnings for it. They
are earning $8-plus.
Q: But for how long?
Well, the company has such great
diversification. I'll bet you they've got the best
currency department in the country. I would
suspect that their mergers and acquisitions
department is second to none. I think it's been
proven. Little Morgan Stanley has just bought
the largest textile company in the U.S., possibly
in the world. And probably, after all is said and
done, Morgan Stanley put up no money, except
maybe for a very brief period of time, and it
probably didn't even put up any money at all.
Q: A pretty neat trick.
Basically, you probably get more brains for the
buck when you buy Morgan Stanley than
anything else I could imagine.
Q: Brains are a notoriously fickle assets
They can pack up and leave anytime.
I do still prefer smokestacks, but I like brains,
and this is my brain company.
Q: Even as Wall Street falls on hard times?
I don't think that Morgan Stanley's business is
being terribly affected by the market. It took a
big loss in British Petroleum in October. But ex-
BP, it made about $1 a share. In October. They
are very well-positioned long term. I suspect
they are making good money right now. When
you can buy a great company like that at very
close to book value, you've got something very
good.
Q: What else are you keen on?
A number of the S&Ls are attractive, though no
one seems to want them right now.
Q: There are so many
I'm not talking about the huge West Coast S&Ls,
either, but some smaller institutions with good
growth and great balance sheets.
Q: Such as?
I would say the most attractive that we have is
Collective Federal, over in Egg Harbor, N.J.
Collective will probably earn somewhere
between $2 and $2.25 next year. Most of that
will be spread earnings.
Q: Meaning from earnings on its interest rate
spread?

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Yes. As opposed to sale of loans. And that stock
is selling at 8.
Q: What's another?
Metropolitan Federal of Nashville, Tenn. It is
selling for around 14. I think they're going to
earn something like $3.30 next year.
Q: And it has a decent asset base?
Yes, excellent. The book is about $23 and the
true book, if you take away good will, is about
$18.
Q: These aren't exactly household names.
How about Metropolitan Financial, of Fargo,
N.D. It's a good one. They'll probably earn about
$2 and the stock's selling for about 8.
Q: But are there enough people in North
Dakota to support any growth at the S&L?
Well, they've actually moved into the great
growth states of Minnesota and Wisconsin, too.
Plus, South Dakota, so it's not just limited to
North Dakota.
Q: You could end up holding an obscure S&L
for a long time before the market recognizes
its value, couldn't you?
Well, it doesn't always have to be fully
recognized by the market. I think, basically, that
people with deep pockets will be increasingly
interested in S&Ls, as they recognize how much
lending capacity they can acquire for relatively
little capital.
Q: Okay, Julian, thanks.



























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Hold That Tiger! --- Money Manager Julian Robertson Is Bullish And Buying
7 August 1989
(Copyright (c) 1989, Dow Jones & Co., Inc.)

TIGER. That's the name of Julian Robertson's
New York City-based hedge fund and, as it
suggests, when it comes to making investment
decisions, he's short on neither aggressiveness
nor cunning. Last time we interviewed Julian, in
December of '87, he was convinced that most
investors were way too gloomy. So he was
buying. That was over 600 points ago on the
Dow.
But Julian doesn't have acrophobia yet. Indeed,
comforted by what he sees as buying coming
from sophisticated corners, Julian is still adding
to his portfolio -- growth stocks, a smattering of
foreign names and a special situation or two. He
spells out all the details in this Q&A.
-- Kathryn M. Welling
BARRON'S: Julian, we hear that you're still
buying stocks, even though almost every stock
market in the world is trading at
stratospheric levels.
Robertson: We aren't that worried about the
market, the reason being that everybody else is
worried about it. And the buying seems to us to
be fairly sophisticated.
Q: How do you figure?
Well, we had begun to lighten up on our position
in Squibb just before Bristol-Myers came in and
bought it, paying well over 50% more than
where we'd started selling.
Q: In other words, since corporations are
doing much of the buying of other
corporations, you think they know what
they're buying?
Yes. It's also that LBO groups are doing the
buying, as opposed to the public getting overly
enthused about something. Then too, people like
Warren Buffett are buying some of the more
high-priced stocks around. So we can't get all
that bearish on the market.
Q: Still, you know what happened the last
time world markets approached these levels.
The markets may be at or near all-time highs,
but in terms of valuations, they are much
cheaper than they were in '87 -- much cheaper.
Earnings are higher, P/Es are lower and all that.
Q: So what are you buying?
I'll mention some of the things that haven't
absolutely exploded. One that we would
recommend would be Fisons, which is an
English drug company. It is relatively small:
$1.6 billion in annual sales. It is probably the
leading allergy-drug company in the world; has
a very strong position in asthma drugs.
Q: Is that an expanding business?
Yes. It has a big new asthma drug, called Tilade,
which will be launched in the U.S. early next
year. We think this drug could have sales of as
much as $250 million by 1993.
Q: Is it already being sold in Europe?
Oh, yes. And even today, Fisons has very strong
cash flow. Plus, it is of a size that means it could
be taken over.
Q: Where is it trading?
At around 22 1/4, or about 15 times this year's
earnings; 12.5 times next year's earnings. We see
a 20% five-year growth rate from the 1990 level.
Q: ADRs presumably trade here?

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Yes, it is easy to buy.
Q: What would it go for in a takeover? About
a 50% premium to the market, like Squibb?
Well, I would think that we could expect even
more than that on this one. Arnold Snider, a
fabulous drug analyst who just joined us from
Kidder -- we have been trying to get him for
eight years -- thinks it would go for 20 times
earnings in a takeover.
Q: What else are you buying?
Smith Corona. You can buy it like water,
because it just came out. It was not a hot deal.
Q: You're talking about its recent "initial"
public offering? Wasn't it an LBO, not all
that long ago?
That is correct. Hanson Plc had taken it over and
really gotten the company going. Smith Corona
is the dominant company in the world in its
business, typewriters/word processors. It has
50% of the U.S. market. It beats the Italians,
Germans, the Japanese, everybody.
Q: Wait a minute, doesn't IBM dominate that
business?
Yes. But Smith Corona's market niche is a little
different. IBM products are designed more for
the office. Smith Coronas are really for your
child going to college. They've just gotten a
distribution agreement with Philips in Europe.
And they are going to distribute a fax machine
beginning in January.
Q: How does all this translate into earnings?
We look for $1.80 this year, $2.30 next, and
again, 20% growth off that $2.30 base. This is a
terrific management.
Q: Where is the stock?
It is at 21 now, and it came out at exactly the
same price.
Q: If it's so terrific, where are the buyers?
Nobody wants to be on the other side, if Hanson
sells anything. But Hanson apparently has a
number of businesses that they will want to sell.
And, if they are going to sell them, it is very
necessary for this -- the first deal -- to be a very
satisfactory one for buyers. So we don't think
that argument is particularly good. We are very
bullish on Smith Corona.
Q: What does its balance sheet look like?
It has a ton of debt. But the cash flow is high,
and they will pay it off rapidly.
Q: Assuming, we take it, that there are no
major economic accidents.
That is right. But in an environment of high
interest rates or in a depression in which people
had to foreclose on mortgages, almost anything
would be bad. You have got to think about those
things, as possibilities, anyway. And you are
right, Smith Corona's debt load is high.
Q: Did Hanson keep a stake in the company's
stock?
Yes, about 50%.
Q: What else do you like?
I really was interested last week to see Mario
Gabelli's commments on Sealed Air. We filed a
position in that some time ago. Which we love.
It is the perfect kind of thing to be levered. It
isn't levered too highly. But at any rate, you've
had enough on that.
Q: And we suspect you've other things you
want to talk about.
You bet. How about a Hong Kong company
called Dairy Farm?
Q: What is it?

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It owns the third-largest supermarket chain in
Australia, although it is only represented in three
of the six Australian states.
Q: But it is traded in Hong Kong.
It is a Hong Kong company; about 40% of its
earnings come from Hong Kong. It has also
moved into Taiwan. And it owns a great deal of
an English company called Quick Save, which is
the sixth-largest supermarket chain in Great
Britain. They have done a great job of growing
the companies they have bought. It is also, by
coincidence, one of the largest ice companies in
the world.
Q: What's it selling for?
It sells now at about nine times earnings, even
though all the good grocery chains throughout
the world sell at literally 15-17 times earnings.
Q: But how does its multiple compare to
those of other Hong Kong companies?
Ten times, or maybe nine times, is the average
multiple in the Hong Kong market. But Dairy
Farm is really a unique situation, and has grown
very much, worldwide. It is not just a Hong
Kong company.
Q: So they presumably are prepared -- or will
be -- when China takes over.
I don't know whether that was a motive, but they
moved into Australia, for example, as early as
'79.
Q: Does Dairy Farm trade only in Hong
Kong?
No. A lot of trading in it also takes place in
Great Britain.
Q: It runs supermarkets in Hong Kong under
what name?
They own 166 7-Eleven's, and have franchised
62 more, right there in Hong Kong.
Q: They have other things, too, right?
They also have a great big restaurant chain
called Maxim's, which is the largest fast-food
and cake-shop operation in Hong Kong. They
have got, for instance, 34 Chinese restaurants, 18
European ones, 24 fast foods, 83 cake shops.
Then they have some of these things in Tokyo
and Manila. They have a Windows on the World
restaurant in Beijing, and a Windows on the
World in Shanghai.
Dairy Farm has really been a good company
over the years. It has also got some convertibles
here that are trading right at parity, which we
think are attractive.
Q: How fast is it growing?
Well, we look for 20% growth in earnings. We
own mostly the convertibles. But the stock itself,
in U.S. currency, trades at about 94 cents. It is
earning about nine cents. Revenues in '88 were
$2.25 billion.
Q: Is the stock widely held?
It was originally owned by one of the very large
Hong Kong operations, Hong Kong Land, which
still owns a lot of it. They bought Dairy Farm in
in '72 and then spun it out somewhere along the
line.
Q: Have you anything you're keen on a bit
closer to home?
The same old standbys. I mean, Morgan Stanley
is very reasonably priced and quite attractive
here.
Q: You're not among those predicting the end
of Wall Street?
Well, it has been kind of the end of Wall Street,
and these guys have meandered through it like a
million bucks. They have done an awfully good
job. I think that the stock is still reasonable.
Q: What's your earnings forecast on Morgan
Stanley?

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Morgan will do about $10, including the LBO
gains, this year.
Q: It is now trading at about 74 --
Plus, it has got a lot of assets there. They just run
their business very well. I think it is very, very
attractive.
Q: Does that exhaust your list?
Hardly. I think that a refiner like Tosco is very,
very reasonable in here.
Q: What's to like?
You have a situation in which the
environmentalists (which all of us are now) are
fighting the idea of building any new refineries,
or making any capacity additions at existing
refineries, and yet at the same time demanding
Q: More highly refined gasoline, which will
pollute less.
Exactly. Environmentalists are demanding that
less vapor be released into the atmosphere,
which really means more refining. That
dichotomy has got to mean that the
supply/demand situation will be in good shape,
at some point, for these people. That's why I like
the Tosco story.
Q: Even though its earnings haven't been
anything to write home about?
Yes, even though earnings have been
disappointing the last couple of quarters.
Certainly in the last quarter, they were very
much so.
Q: Isn't Tosco's balance sheet pretty highly
leveraged?
Yes, but it was coming down pretty fast until
they recently levered it up again, I guess, to
acquire a fertilizer company.
Q: What's the upside in something like
Tosco?
Well, Tosco doesn't pay any taxes -- it's not
going to have to pay them for a while. So it will
probably earn 40-50 cents this year, and 70-80
cents next year. I would think that it could sell at
eight-10 times earnings. And, it'll have a lot of
earnings beyond that point. There just are not
many refiners left. There is also the possibility
that it'll be taken over by a larger company.
Q: Isn't Tosco pretty rich, based on those
numbers, at 17 and a fraction?
What? It is selling at about 3 5/8.
Q: Not on our Quotron.
Good gosh, I am wrong. Tosco did a reverse
split on Wednesday. It was a 5-for-1 reverse
split, which in my opinion was a very stupid
mistake. Anyway, that is why it is at 17 1/2.
Q: And you'll have to adjust your earnings
forecast.
We have to change those numbers. We are
looking for $2.50 this year, and $3.50-$4 next.
Q: Why are you unhappy with the reverse
split?
I just think that there are a lot of people who
love those few solvent companies that have a
stock price under $5 a share. As a short, I know
how difficult it is to get one down below $4.
Q: How about a big company?
I think Dow Chemical at its present multiple is
just ridiculous. I mean, 6.5 times its current
earnings. I just can't believe that, for a company
that great. The relative multiple is absurd. In the
next recession, they are going to do so much
better than they have in past recessions.

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Q: Clearly, a lot of folks are unconvinced.
And they're afraid that commodity chemicals
will hit a brick wall.
I agree with them on the commodity-type stuff.
And certainly, Dow has exposure to commodity
chemicals. But Dow is probably the best
commodity producer. And they also have a lot of
very great specialty chemicals. Then there's
Merrill Dow, and now, Marion, which are really
completely non-cyclical.
Q: Where should Dow be trading?
If it sold at its normal relative multiple, it would
be selling at something around $160.
Q: How do you get to that?
Dow really does almost always command a
premium to the market, let's say 1.3 times the
market multiple. Normalized earnings,
somewhere between a peak and a trough year,
would probably come to around $11 a share.
Let's say it will earn $14.50 this year, and $8 in
the trough. If you took $11 and put their normal
premium multiple on that, you would still come
up with something around $165 a share.
Q: So the cyclical label obviously doesn't
frighten you.
We are really in growth stocks the likes of which
we've never been in before -- the Wal-Marts,
Albertson's, Merck, Fisons, Johnson & Johnson.
And where we are in cyclical stocks, they are
great big companies like Dow and that sort of
thing.
Q: What does it tell you?
It tells me that the values are still in the growth
stocks. We, for instance, think Wal-Mart will be
the most secure 25% grower over the next five
years. That takes a pile of believing, because it
means their sales will probably be bigger than
the GNPs of most superpowers. But Wal-Mart
really is a powerhouse.
Q: Nothing grows to the sky, as the cliche has
it.
True, but they are not even in California; they
are not in the Northwest; they are not in the
Northeast. And they are just going like
gangbusters in some parts of the South. Plus,
this Sam's Warehouse chain that they have is
really centered in the disaster states --
Oklahoma, Texas, Louisiana. At some point,
things will improve, even there.
Q: What kind of earnings do you see Wal-
Mart reporting?
Wal-Mart will be earning, in six years, about
$7.60 a share. Now, at $7.60 of earnings, where
will it be selling? If you put a 15-times multiple
on it, you make a lot on your money. If you put a
20-times multiple on it, you really have a big
winner.
Q: Well, it would seem that if you have to
look out six years, you're stretching just a bit.
Is there something more immediate in your
portfolio that's attractive?.
The first PIK preferred that we have bought. PIK
stands for payment in kind. We figure we are
going to do very well in this, if Hospital Corp. of
America remains solvent.
Q: Which is not a small consideration.
Like everybody else in the world, we think
hospitals are a needed item, and are going to be
more so as more people live longer. HCA is way
ahead of their plan for selling off assets. And the
returns on these PIKs are just unbelievable.
When we bought into this thing, all it had to do
was to remain solvent for us to make a 40%-
50% return on our money per annum, over about
a three-year period.


Q: How does it work?

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Let me get Pat Duff, one of my guys, to tell you,
if I may. He's really done the work for us in this.
Duff: It is pretty straightforward. HCA finished
up their LBO financings in March. One of the
distributions was a PIK preferred, which was set
at a $25 face value, with a $4.37 dividend, or a
17 1/2% yield. That was what the bankers had
determined the yield would have to be to get $25
of value. Well, this was no sooner distributed to
the shareholders than it just collapsed.
Q: Leaving some red-faced bankers --
Well, at the time that they did the distribution,
there was a lot of concern about junk financings.
RJR Nabisco was finishing up its financing as
well, and suddenly the PIK preferred market
became a field of land mines.
Q: How far did it drop?
Duff: It got down as low as 15-15 1/2, at which
point it had a 29% yield. The company had only
been private for a month. Everybody had already
written it off. So we began buying around 15
1/2.
Q: And since then?
Duff: What has happened in the ensuing months
is that, as planned, the company announced that
they were going to make several asset sales --
their psychiatric hospitals and their European
hospitals -- and that the substantial proceeds
would go toward paying down the bridge
financing for the deal. What will be left then will
be bank financing, some senior subordinated
debt and then our "junk debt," PIK preferred and
a PIK subordinated debenture. As the asset sales
have come in much sooner then expected and for
dollar amounts higher than expected, the PIK
preferred has picked up in the market and gotten
to a more realistic yield.
Q: What's the upside on the PIK preferred
from here?
You have a PIK preferred that is still paying
you, in additional preferred shares, at the rate of
$4.37 a year, selling at a current price of $21.50.
So you are talking about approximately a 20%
yield on a company that is hitting all its targets.
Besides, as Julian likes to say, having these PIK
preferreds outstanding is like having the devil
chasing you with a pitchfork. You don't want to
have these things around too long. They can get
pretty onerous, as the obligation is growing
every quarter.
Q: You think they'll be redeemed early?
The asset sales, while they have been
announced, don't close until the end of the year.
We think that when these asset sales are
consummated and the cash comes in, it will be
used to pay off bridge financing. But then the
company may have some additional cash coming
in from some other unannounced transactions. If
so, its bank lenders may let it retire this preferred
stock early.
Q: The risk is that, if something goes wrong
with the LBO, you are at the very bottom of
the totem pole.
Robertson: Most definitely, except for the
management, which owns the stock. If this were
a stub, this would be the stub equity. Every time
the company pays off a dollar of senior debt, it
makes our junior PIK debt a little bit more
secure. But this is not a double-A credit by any
stretch of the imagination.
Q: Don't PIKs present tax problems to
individual investors?
Duff: They do, from the standpoint that you are
getting a non-cash instrument and you are going
to pay tax on that. But I think a 20% yield
probably discounts a fair amount. To put that in
perspective, a PIK bond of this same company
currently yields 16%. And it is only a hair more
senior.
Q: You mentioned liking a couple of other
retailers besides Wal-Mart. Unlike a lot of
folks, you must think the consumer is doing
okay.

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Well, Wal-Mart sells a lot of staples, and
certainly their same-store sales seem to zoom
along regardless. Albertson's is, you know, in
food and unless everybody goes on a diet, we are
all right there. I also think Toys 'R' Us is very
attractive.
Q: Despite the punk quarter?
It has just reported a disappointing quarter,
which they warned everybody about. It was a
very poor period, but we think that in Europe
they really have the Toys 'R' Us concept going
along beautifully. That is going to be the fastest-
growing area for Toys 'R' Us. They have had
these little weak quarters before, but they're
really not important unless they happen in the
fourth quarter.
Q: And you see a strong Christmas?
We think by then the desirable toys will be in the
stores and they'll continue to take market share
away from the other people who sell toys.
Q: You run a hedge fund. What are you
shorting?
We love some shorts. We still think the main
problem in the market would be Japan, so we
have a lot of puts on the Nikkei market. We
think of that as an insurance policy, though. We
really almost hope that nothing happens to Japan
because that would have broad effects over here,
if it did happen.
Q: Do you have any domestic shorts?
McDonnell Douglas is a wonderful short.
They've never made any money in commercial
aircraft. So we don't know why everybody
assumes that they are going to make money in
commercial aircraft. They certainly are not
showing any signs of it right now. We also think
the generic drug makers are good shorts --
Mylan and Bolar. I mean, none of these
companies really has much going for it. Mylan's
earnings are continuing to go down. Basically,
they are companies that just have nothing
proprietary, no sales forces or anything. And,
they have big multiples. We continue to be short
various commodity chemicals, but I would
rather not give names on that.
Q: Oh, come on.
We think that the Italian chemical company,
Montedison, is overpriced and will crack when
the commodity chemicals come apart.
Q: Julian, thanks.