1
The Business Journal-Milwaukee
January 1, 1994
A world view of oil from a window on Wisconsin Avenue
BYLINE: Glenn Deutsch
SECTION: Vol 11; No 13; Sec 1; pg 8
LENGTH: 1701 words
DATELINE: Milwaukee; WI; US
What's an oil industry analyst doing in Milwaukee? Just about everything right, if it's George Gaspar, a first vice
president of investment brokerage Robert W. Baird & Co. Inc, which publicizes the weekly Gaspar Report on the oil
and oil-service industries.
Don 't just take our word for it. The Wall Street Journal, working with Chicago-based Zacks Investment Research,
named Gaspar third-best among 76 domestic oil-company stockpickers in 1993, based on their aggregate rerurns on
1992 recommendations.
Gaspar and his four-person staff report on more than 60 energy and energy-related companies, and also consult
with firms on the economics and politics of exploration and development.
Introduced to his specialty in the mid-1960s while working at a small Milwaukee brokerage he co-founded, Gaspar
was "very enamored of the high-tech aspects" of the oil business when he joined Baird in 1975.
Gaspar recently discussed the oil patch today the energy outlook for business, and some hot, related political and
public policy issues.
Q. What turned you on to researching energy stocks?
A. What really drove my interest was getting out in the field. There were a couple, three people in the oil patch in
Oklahoma and Texas that kind of tucked me under their wing, so to speak, and taught me the business. And I spent an
enormous amount of time in the oil patch learning what it was all about.
Q. And from there, it was the technology?
A. Watching all the intricacies of what was going on in the oil patch and the technologies that were starting to come
forward. I come from a family that was very entrepreneurial-based, and there is no area more entrepreneurial than drilling for oil and gas.
Q. It must be difficult to follow oil companies from Milwaukee.
A, There are some positives and negatives being here, as opposed to in Houston. The real positive is that we can be
objective; we can sit back up here and watch the whole show unfold. On the other hand, because the patch is where it is,
I make Memphis my second home, just stopping over on airplanes. I spend a lot of time in Houston, Dallas, Oklahoma
City and New Orleans.
Q. Domestic oil prices have slid from about $ 19 a barrel in October to about $ 14. Where do you expect prices to
bottom?
A, We can bottom short term at the $ 14 level. We could also rally, but we would need colder weather in the Western Hemisphere for that to happen.
Q. Is there a price you'd like to see? A price that would make everyone happy, from the OPEC (Organization of Petroleum Exporting Countries) cartel to Milwaukee consumers?
A. Someplace between $ 18 and $ 22 is a happy medium.
2
Q. What's your read on President Clinton 's initiative to help the oil and gas industry produce more inside the U.S.?
A. This may be one, big battle forming in Congress. The country's never been much for creating incentives for the
oil industry. The key is going to be to what extent the American people see that we are giving away our security to the
Middle East if we don't create an environment where we can stabilize our oil and gas infrastructure. The administration
has got to put forth a plan to get more oil barrels out of existing production areas.
Q. In sum, low oil prices have meant less U.S. drilling...
A. And another six months of falling oil prices will send U.S. production down by another to 5 percent, and increase our imports even more.
Q. What's the current import picture?
A. This year, the United States is going to be up about 750,000 barrels a day in imports, to 8.3- to 8.4 million. Percentagewise, I'm talking about a 10 percent increase for the year. That's a giant leap. Fifty-two percent of the U.S. trade
deficit is now oil...
Q. And one risk is that American companies may be drilling in countries that are unstable?
A. Yes, that is a major risk. We're getting a good sample of that in Nigeria, which is a large producer, 1.9- to 2 million barrels a day. They've got a very unstable regime, and many parts of the major (oil) companies are in there.
This also exists in other parts of West Africa, in the Middle East, even in Yemen right now, which is a good exploratory area. There are border disputes between (Yemen) and Saudi Arabia.
The Far East has been a little unsettling, but the Indonesian area has been pretty good to American companies.
Q. What about Russia?
A. The Russian frontier--and the CIS (Commonwealth of Independent States) area--is a bastion of opportunity. It's
the major wild-card player in the market. For the 11 months ending in November, Russian daily crude production fell 14
percent, to 6.9 million barrels on average; and for the CIS, including the state of Russia, production since 1988 has declined from 12.6 million to less than 8 million barrels.
Q. Meaning they need help. But why the declines?
A, The collapse of civil infrastructure and the lack of maintenance in oil fields and on equipment, including pipelines, where it is not uncommon to have a pipeline break every day.
Q. How worried are you about Russia's political struggles?
A. We should be most concerned about the possibility that (President Boris) Yeltsin would be eliminated from an
influential political position...
If you're an American company just getting active in Russia, and all of a sudden there's a political change, the country becomes hard-line, and your ability to negotiate equitable deals all of a sudden becomes null and void, that's certainly going to cause a withdrawal of Western technology and Western help, which is going to make it more difficult for the
U.S. to accommodate Russia's needs in terms of hard currency and loan agreements.
Q. Where are we in that scenario?
A. It's too early to say whether the hardline tendency is going to pick up momentum. Russia is going through a severe winter. If there's going to be a collapse within Russia, it should be in '94. And if Russia can manage to hold itself
together under Yeltsin for the first half of '94, there's a reasonable likelihood that something positive can come out of
the U.S. influencing the continuing of the democracy trend. But if the continuing infrastructure collapse, helped by a
severe weather pattern, causes the hard-line movement to increase its presence, it could make for trouble by mid-94.
Q. Yet even now, the infrastructure problems mean opportunities for oil companies willing to assume big risks.
A. Russia is a vast asset potential, from the point of view of a major U.S. company. Most of the majors are now
moving in. The Chevrons and Texacos and Conocos see the challenge as being too good not to accept the risk of working in Russia at this point.
3
Q. What would happen to world oil prices if the United Nations lifts the Iraqi oil embargo, an event seen as conceivable after mid-1994?
A. It's a monumental question and there isn't an easy answer to it. Let me just frame what we think. First of all, Iraq
is producing, like, 600,000 barrels a day for internal consumption and sales to Jordan, and maybe a little bit that's dribbling into Iran. It has capacity to do over 3 million...
The problem is that the rest of OPEC is going to have to integrate back into the system anywhere from 500,000 barrels day to 2.5 million over a period of months to maybe a year or two--and that means Saudi Arabia, Kuwait, Iran, Nigeria, Unit Arab Emirates are going to have to cut production to maintain some stability of price.
Then there are two other elements in equation coming from the non-OPEC world: new production in the United
Kingdom and Norwegian sides of the North Sea and a flat worldwide net demand for this year.
Q. So OPEC doesn't have a lot of room to maneuver.
A. It is going to face a task of getting some real major agreement among the key countries in the Persian Gulf to reduce production. Or, we could see (OPEC) oil prices fall back even more than the current level of $ 12.50 a barrel.
Q. Demand is flat, but I've seen predictions that the price of crude will rise 5 percent a year over the next four or
five years.
A. The demand flattening-out that we have experienced this year is short term, due in part to recessions overseas.
We probably are going to get back to 1 to 2 percent annualized gains, which would be someplace between 600,000 to
1.2 million barrels per day, per year, of increase in oil demand starting in 1994 through '96-97.
If that's the case, OPEC can have Iraq reintegrated totally--probably be at near-capacity itself. Then the whole oilprice equation starts to shift, and we could see prices finally starting to lift off.
Q. As you think about the way companies big and small use energy, what do you see?
A. Basically, we don't have a sense of a negative vibe for industry at this time, or business in general, because of
what we see in world oil markets or gas markets. Prices are going to be relatively stable... There's one element, though,
that's coming through the maze that I keep thinking about.
Q. What's that?
A. We're watching and trying to understand what could happen if Iraq's readmittance to the export system for world
oil is not contained by OPEC, if they cannot control production to hold prices at a reasonable level. Many of these
OPEC countries in the Persian Gulf are heavily in debt now.
The thing that bothers me is that the Saudi Arabias and the Kuwaits have vast international investments. There is
always a possibility that, because of lower prices, their budgets would become disjointed. If they had to really pull out
the billions of dollars they have invested outside the Middle East--in the United States, Europe, and so on--it could
cause a real disengagement, economically, in certain areas.
Q, Such as?
A, Real estate, basically. Investments in various companies. Or financial assets that are in the banks, generating interest.
It's something to really think about. As much as we would like to see low oil prices, I don't think it's in the best interest of anybody who consumes any kind of oil daily to see oil prices decline very much, because it's simply going to
disengage America's ability--any further ability--to produce oil at the current level. It's going to make us more and more
dependent on the Middle East.
Copyright 1994 UMI Inc.;
Copyright The Business Journal of Milwaukee Inc. 1994;
Business Dateline
4
The Business Journal-Milwaukee
September 11, 1993
Small investors, smart money
BYLINE: Glenn Deutsch
SECTION: Vol 10; No 49; Sec 1; pg 1
LENGTH: 1129 words
DATELINE: Milwaukee; WI; US
Check the small investor for vital signs of the economy and, chances are, you won't find a pulse.
While record numbers of individuals are joining stock or bond mutual funds, many are financially inexperienced-forced into the market to escape near-inflation returns on bank savings instruments.
Not so with investor clubs.
They're a much smaller tier of organized small investors, structured like mutual funds, but who do their own
homework. Far from inexperienced, some claim to know more than market professionals.
With the economy stumbling, the autumn months historically iffy, and the media speculating that a run on mutual
funds could promote a dangerous downward market spiral, what do these informed amateurs forecast?
They are cautiously bullish.
Why the optimism? Because small investors are moved more by a dream of retiring rich than by fears about today's
low interest rates, according to Lorrie Gustin, a vice president of a secretarial services company, and a member of Ticker Tape Tamales, a Milwaukee investment club founded 30 years ago.
What's more, she said, as most clubs mix growth and value investing styles, a turn south in market sentiment
wouldn't necessarily be bad.
"If all this talk does push the market down, it's going to create some very good buying opportunities for those of us
who are watching," she said.
What separates the investment philosophy of these small investors from the conventional wisdom on Wall Street is
that they tend to be patient, and that helps stabilize stock prices over the long run.
Also, many longtimers have known at least two major bear markets, those of 1974 and 1982. That, plus their ongoing fundamental research--and impressive performance figures--may make their views of the current market as worthwhile as those of professionals, many of whom are too young to have known a long down market.
The stereotype of club members is that they invest $ 10 a month and hold stocks for life. In reality, longtime members discuss company fundamentals, market conditions and the economy much like professionals. And Gustin said her
club, at least, trades a lot.
BEATING THE PROS
There are about 500 investment clubs in the Milwaukee area, according to Gustin, up from about 400 around the
time of the October 1987 market crash.
The National Association of Investors Corp., (NAIC), a Royal Oak, Mich.-based nonprofit organization that serves
as a clearinghouse of information, says its membership rose 24 percent from August 1992 to August 1993, to 10,233
clubs. There were about 7,500 clubs in 1987.
NAIC chairman Thomas O'Hara said inquiries about starting a club have risen fivefold over the last two years, to
an average of 10,000 a month this year.
5
According to O'Hara, an April survey of 500 clubs found 38 percent equaled or exceeded the broad-based Standard
& Poor's 500 stock index over the club's lifetime. The average club earned a 10.5 percent return, compounded annually
over 130 months, as against 11.2 percent for the S&P during that span, in both cases with dividends reinvested.
"That shows they are as good or better as most professionals. About the best figures we see are that 25 percent of
professionals equal or exceed the S&P 500" over such long periods, O'Hara said.
Most clubs grow out of work, church, alumni groups or shared occupations. Tom Duffy is one of five certified public accountants in the 10-member FEE Investment Club.
The club, which invests $ 500 a month has in about 20 years invested roughly $ 91,000 and paid out $ 94,000, leaving current assets of about $ 53,000, said Duffy, a founding member. There are 10 stocks in the portfolio. Favorite sectors include gaming and regional banks.
Duffy, treasurer of a group of construction companies, forecasts moderate economic growth for about the next 18
months --"until we pet this health care question squared away and see where this (recently passed federal) tax bill takes
us."
CORRECTION, NOT COLLAPSE
Investment clubs also graduate full-fledged individual investors.
Take Stephen Zantow, a vice president and secretary of Stevens Construction Corp., Milwaukee. A FEE member
from 1973 until 1990, he left the nest when he couldn't find time to attend meetings.
But what a nest egg he has now. He's amassed a "low six-figures" stock portfolio, 5 percent of which is invested internationally, and has another $ 30,000 in 401(k) stock and bond mutual funds.
He foresees a 5 percent market "correction" in the future somewhere, but not a collapse.
Gustin, a past NAIC national chair and past president of the Milwaukee council, said Ticker Tape Tamales--forget
their risque name--is one of the most conservative local stock clubs, and the eight members generally are not afraid of
the market.
Aside from the politically volatile drug and medical sectors, the Tamales--who claim a 10-year, 45 percent compounded annual rate of return--are hot on the trail of stocks being driven down by mutual funds.
"We get in hopefully to make money around them," Gustin said. "We try to beat them to the punch."
A STABILIZING FORCE
Total assets in stock mutual funds were about $ 595 billion at the end of July, according to Investment Company
Institute, a Washington, D.C., trade group. Total holdings of NAIC members exceed $ 37 billion, according to the association.
The clubs are "a real force in the market," said Jerry Liss, a Milwaukee brokerage president who traded for clubs
from the 1950s through '70s. He was surprised total holdings are so high.
At that level, he said, clubs provide market liquidity and "support the market with buying into companies that are
going to do well. And that makes other people notice if that company is doing well."
Companies like Johnson Controls Inc. Glendale, and Modine Manufacturing Co. Racine--which aren't household
names and thus have relatively little individual stock ownership--even market their stock to individuals through the
NAIC.
Modine recently exhibited at an NAIC convention. Public and investor relations director Gerald Sweda said he's using NAIC channels to increase stock ownership by individuals unaffiliated with Modine, a grouping that now owns
about 20 percent of the stock. Institutions own about 30 percent.
"We think normally individuals are more loyal to a company, not the people who jump in and jump out," Sweda
said.
Glen Ponczak, a spokesman for Johnson Controls, said his is one of nine companies on the New York Stock Exchange that allow individual investors--in or outside of a club--to buy stock without a broker commission starting right
with the first purchase.
6
Ponczak said Johnson Controls "is always trying to increase" its number of shareholders, and that only about 25
percent of its stock is owned by individuals.
Copyright 1993 UMI Inc.;
Copyright The Business Journal of Milwaukee Inc. 1993;
Business Dateline
The Business Journal-Milwaukee
April 24, 1993
Lipton's subtle hand guides subtle returns at SWIB
BYLINE: Glenn Deutsch
SECTION: Vol 10; No 29; Sec 1; pg 10
LENGTH: 1635 words
DATELINE: Milwaukee; WI; US
At a meeting of the State of Wisconsin Investment Board last fall, board members stopped on an investment holding: Senior managers of the company had awarded themselves average salary hikes of 27 percent even though the firm's
earnings per share were down 64 percent.
Instead of advocating that the pension fund sell its shares or publicize the greed, Patricia Lipton, the fund's executive director, emphasized that its policy was not to second-guess management salaries but to seek to tie pay to performance.
A subtlety, enunciated by a consummate behind-the-scenes player.
All the same, the fund had bared its teeth on the subject of corporate governance. This March, the snarl caught another company, Paramount Communications Inc., right on the neck. The fund's board withheld votes on four director
nominees because the New York City firm failed to link executive pay to company performance, and advocated other
shareholders nationally withhold theirs.
With $ 33 billion invested mostly for retired state and local government workers and teachers, the State of Wisconsin Investment Board (SWIB), is one of the nation's largest public funds. It could be a $ 33 billion gorilla.
But not under Lipton, a 50-year-old, fox-and-hound-set economist who prefers the tempered approach to heady issues; makes final decisions on which broad investment categories will get what percentage of the 74-employee fund's
assets; and helps her seven investment directors manage their staffs.
"She's a capable administrator," said Ab Nicholas, founder of a Milwaukee mutual-fund company.
A huge fund moves like an ocean liner, but Nicholas, who is also a University of Wisconsin regent, said he found
SWIB's results under Lipton "to be satisfactory when you're talking about $ 33 billion."
Total assets under management are up 28.4 percent to date since the June 30 end of fiscal 1991, and up 41 percent
since year-end 1990.
SWIB's rate of return for its main fund --which includes stocks, bonds and real estate--was 9 percent for the three
years ended June 30, 1992, compared with 12.3 percent for Standard & Poor's 500 Stock Index with dividends reinvested.
DYED-IN-WOOL PRAGMATIST
Lipton was born Patricia Bowl on Dec. 9, 1942, and grew up with a younger sister in Burford, a town about 15
miles from Oxford, England. Burford was a swinging place in the 15th century, when it was the hub of the wool industry, and the home Lipton grew up in was built four centuries ago for a wool merchant.
Her forebears owned agricultural concerns; her father, an engineer, ran a large construction company with his
brother. She recalls being a daddy's girl.
"I was his favorite," she said with an accent tempered by 30 years in the States.
Lipton was raised in a secure and stable family life in a "very upper middle-class sort of neighborhood" where
"everybody was Episcopalian," and where she was top of her class, class president, and captain of her tennis and hockey
teams--positions she analogizes to her current job.
Her favorite subject was economic history. A self-described pragmatic and active person, she says economic activity makes the world go 'round.
"She's one of those intelligent, really high-achieving female professionals who is everywhere in business these
days," said a money manager who asked not to be named. "But 20 years ago, she would have been maybe a high school
principal or nurse, because those were the restrictions on women."
Lipton agreed.
"I was actually supposed probably not to do anything terribly serious with my life, and because I was good in
school, there was some thought that I should be a teacher," she said.
She worked part time for a lawyer and dabbled in early Sixties fads, but mostly stayed within her environment--"the
hunt-ball scene, the county set, the country weekends."
"My granpy (grandfather) rode the hounds, and I was 'blooded,' " meaning as a child, she was initiated into the circle by grown-ups who marked her forehead with a foxtail dipped in blood.
"And then there was the more urban sort of appeal, and the intellectual sort of scene. I tried everything."
Margaret Thatcher notwithstanding, England's view of career women is even more backward than America's. For
role models, Lipton saw her mother on the one hand and "bluestockings" on the other.
"'Bluestocking' means very serious, usually unattractive, a lot of negative things," Lipton said.
But a woman Lipton described as a typical bluestocking was one of her role models.
"She lived in a big house, she had three cats, had a wonderful, sort of lively mind. But she was eccentric as all getout. And she was unmarried."
Her mother, meanwhile, was a gracious woman who encouraged Lipton to bring friends home from school and
have tea by the fire in the sitting room.
"It was like you couldn't have it all, and I wanted all of it," Lipton said. "Where can you get all of it and put it all
together?"
She found part of the answer when, at an Oxford jazz club, she met Peter Lipton, a New Yorker attending Oxford
University.
Now a neurophysiologist at the University of Wisconsin-Madison, "one of his aspects is that he's an intellectual,
and he really validated some of the parts of me--the serious part of me," she said.
Her husband's career took them to San Francisco, where she worked for a marketing research company--a position
she took because she'd read that the first U.S. job of author Jessica Mitford, who lived near Lipton in England, was in
marketing.
Lipton got her bachelor's degree in economics at the University of California at Berkeley. The free speech movement, in full bloom, made it "a very exciting place to be " But she doesn't link being there to helping lead a shareholder
rights movement today.
"I would like to make it even more personal--it's really important to examine things, to keep asking why and challenging your assumptions."
The Liptons spent two years in Philadelphia, where as a research assistant for the Federal Reserve Bank, she studied monetary supply and conferred with executives.
The couple wound up in Madison, where she earned her master's degree in economics. She became director of state
Department of Revenue's Tax Policy Bureau, but after seven years, tired of dinking with the tax code.
In 1982, Clare Zempel, now chief economist at Robert W. Baird & Co. Inc., Milwaukee, hired her as an associate at
First Wisconsin National Bank of Milwaukee.
Lipton had taken an apartment in Milwaukee and thought she could go home to Madison on weekends. But after a
few months commuting back and forth, she foresaw the end of her marriage.
"I wasn't prepared to sacrifice that," she said.
She secured the job of executive assistant at SWIB and returned to Madison. She later became assistant executive
director, working for two executive directors, one of whom was Marshall Burkes.
After two years on the job, Burkes was fired in June 1989 for mismanagement and verbally abusing subordinates,
trustees have said.
But Burkes would not be gotten rid of quietly, or burked, to use a Scottish word. He sued James Klauser, Department of Administration secretary and SWIB trustee as well as the other trustees: Nicholas Hurten, deputy secretary and
an alternative trustee for Klauser; William Gerrard. a Madison lobbyist, real estate broker and Klauser pal; and the entire eight-member investment board as a corporate body.
The lawsuit seeks reinstatement, monetary relief and damages. Burkes' charges have been roundly contested by
Klauser and others, and the suit has been delayed many times.
But in his 1989 complaint in Dane County Circuit Court, Burkes alleged he was terminated without cause in retaliation for "voicing matters of public concern" to SWIB, the state attorney general and Legislative Audit Bureau about
Gerrard's alleged influence-peddling at SWIB.
In contrast to Burkes, Lipton has been described by others as collegial.
"Burkes was authoritarian to the max, and Pat is almost a diametric opposite," said James Severance, SWIB assistant executive director and investment director for common stocks.
What was Lipton's most daunting problem after being picked to replace Burkes?
"Just having to play a leadership role in such a big sort of activity," she said. "Just getting people to buy into me.
Being able to work well with a board, with a strong staff."
It's easy to imagine the blooded Lipton also enjoying, at least a little bit, the fox hunt going on around her.
Lipton now is working with trustees on staff salaries and outside managers. In doing so, she is planning for a future
of rising assets but in which four of seven SWIB investment managers will reach retirement age within 10 years.
One of her toughest projects is keeping up morale in a public agency engaged in private-sector activities. Although
not tethered to the state pay scale, SWIB underpays its money managers because of it.
The $ 90,000 salary and performance bonuses earned by SWIB investment managers is 10 to 20 times less than
what some portfolio managers make in Milwaukee. They must stay because they love Madison, have a public calling,
are still on the rise, or don't want to give up getting the research and advice only billions under management can buy.
And SWIB is as close to a pure investment environment as you can get.
"By and large, we don't have to convince people to put the money here," Lipton said.
Lipton largely avoids the Capitol, which is just as well, said state Sen. Donald Stitt, a Port Washington Republican
and Joint Finance Committee member.
"Very few people in this building understand how money is run," Stitt said. "Hers is the one agency whose independence the Legislature respects."
How would politicians evaluate investment returns, anyway? They're often matters of degree. Of subtlety.
Copyright 1993 UMI Inc.;
Copyright The Business Journal of Milwaukee Inc. 1993;
Business Dateline
The Business Journal-Milwaukee
May 22, 1993
Seeking, and finding, performance in the '90s
BYLINE: Glenn Deutsch
SECTION: Vol 10; No 33; Sec 1; pg 10
LENGTH: 1681 words
DATELINE: Milwaukee; WI; US
Ab Nicholas, 62, is the dean of local mutual fund managers. His 24-year-old Nicholas Fund carries a five-star rating from Morningstar Inc. a Chicago-based mutual fund rating service, for being a "proven workhorse" in varied markets.
Nicholas invests mainly in small-and medium-size companies. His emphasis is on earnings growth, but he's not
above seeking downtrodden "value" stocks.
flexibility has its rewards. Thorough mid-April, while value funds gained 7 percent and growth ones lost 3 percent
nationally, Nicholas Fund was at about zero.
David Nicholas, 32, an analyst for Nicholas Co. Inc., Milwaukee, for eight years, recently succeeded his father as
manager of two other funds: one that's closed to the investors, and the $ 750 million Nicholas II, a more aggressive,
smaller-company version of the $ 3 billion hallmark fund.
While the duo are fairly upbeat on the economy, they also foresee more bargain hunting for performance in a decade of diminished returns.
Q. The bond market was arduously courted by President Bill Clinton, but lately has beer giving him the
thumbsdown. How does that affect you?
A. Ab: The biggest underpinning to the stock market is the bond market. If we see rising interest rates and declining
bond prices, we're in trouble. The stock market in general is already very fully priced.
Q. What's your economic outlook?
A. Ab: Interest rates are low. The Federal Reserve is not forcing rates up, and it looks like a slow, modest recovery
for some time. So that's a good background.
Q. Modest for your portfolio stocks would be 1993 average earnings of what?
A. David: We like to buy companies that will grow at 15 to 20 percent. In general, I would say 15 percent for 1993.
Q. You tend to use both growth and value investing styles. Sometimes it's hard to draw a distinction, but why both?
A. Ab: Because we can't find enough growth stocks that are cheap enough or attractive enough to make us be totally committed to that program.
David: We try to buy growth at a value, and that's different from a value approach to investing, which most people
look at as buying things at less than book value, or at some underlying value.
Ab: In our universe of stocks back in the late '70s and early '80s, we could buy a stock at one-half its growth rate in
P/E (price-to-earnings ratio). The stock maybe was growing at 20 percent and we could buy it at 10 times earnings. Today, we can find a few that are below one times the growth rate. And if you have to pay two times the growth rate, we're
usually selling those.
Q. How much cash are the two funds carrying? Morningstar put it at 9.3 percent for each at the end of 1992.
A. Ab: Nicholas Fund is 9 percent as of last night (May 13), and Nicholas II is 7.3. We consider fully invested to be
anywhere from 0 to 10 percent in cash. We happen to have a little more now than normal.
Q. One sector represented well in both funds is financial services, Among Milwaukee companies are Marshall &
Ilsley Corp., MGIC Investment Corp., Firstar Corp. and Fleet Mortgage Corp. There's also First Financial Corp., Stevens Point.
A. Ab: We love those.
Q. Some analysts believe the financials have had their ride and will turn south.
A. David: They've had a big recovery for two or three years; I don't see that big recovery going forward. But I do
see continued growth in the banks. They've cleaned up a lot of their bad loans; a lot of the weak players are gone. And
as the economy comes around, they'll get some loan growth, and that should help. They also have a good fee component.
Ab: The P/E ratios as I look down the Nicholas Fund list range between 10 and 15, which isn't too bad. And these
companies can grow at 10, 15 percent a year. So you've got that one-to-one relationship, and we don't feel we're going
to get hurt by that kind of scenario.
Now, relative to book value, they're closer to two times (earnings). When you could buy them at one times or less
than one times book, you were getting a real bargain; now it's just average value.
Q. MGIC posted all sorts of wonderful first-quarter results, and some people further see lower mortgage payments
as reducing the likelihood of defaults. On the other hand, a company founded by MGIC's former president says it can
capture 10 to 15 percent of the market over the next three years by providing lender-paid mortgage insurance. Do you
see a possible hit on earnings?
A. David: I don't. MGIC is well-managed, and they've said they are closely monitoring that situation and will do
what is necessary to protect their market share. They'll be able to handle it.
Q. Earnings per share for MGIC were $ 3.48 for 1992. I've seen projections for 1993 of $ 4.15 to $ 4.20; for 1994
of $ 4.80 to $ 4.85. Is that in the ballpark?
A. Ab: The interest rate outlook over the next 12 to 18 months might have some impact, but we don't see that as being a huge risk to them. I think we might see some drift upward in interest rates; some people think the opposite. But we
think this company can maintain its earning power and grow at a pretty good rate.
Q. Let's talk about Firstar.
A. David: It's been in Nicholas II and is being added to Nicholas Fund. They've done a fantastic job of cleaning that
bank up, in terms of real estate, operations, and concentrating on fee income and Midwest banking.
Ab: Their cost control program is exemplary. And Firstar Asset Management is growing its assets under management both through investment results and through marketing. They love it as a strong growth area just like M&I loves
their data processing unit.
Q. Large pharmaceutical P/Es are now at a 20 percent discount to the overall market, by one account. You bought
some battered drug stocks in April. Still buying?
A. David: We were buying at the height of pessimism. They've all had a fairly good move since then, so we haven't
been buying them recently.
Ab: Nicholas Fund has 12.55 percent in health care now. I think we doubled our health care stocks in the last nine
months. In Nicholas II, you've got almost 15 percent in health care.
Q. I know you don't like biotech companies. What's health care for you besides drug companies, then?
A. David: Health care services companies. Hospital management companies.
Ab: We've got 21 health care stocks in Nicholas II. We're just now buying a company called Surgical Care Affiliates Inc., Nashville, which has outpatient surgical care centers. It's 23 times earnings with a growth rate of close to 30
percent historically. And that really hasn't changed any; it's just the perception is things are going to slow up.
Q. You've always generally steered clear of initial public offerings, Why?
A. Ab: Because those stocks are broad in bull markets, they're promoted by the brokerage community and investment bankers. Companies like to bring their stock to the public at an advantageous price to them and not especially for
the investor. We'd rather have it get out in the public, let it develop its life, and then look at it. There we have a chance
to buy it at more reasonable prices.
Q. At the end of 1992, Philip Morris Cos., New York City, was the largest holding in Nicholas Fund, about 4.3 percent of net assets. What's happened since the market beat up Morris?
A. Ab: We have not added any shares. We're going to hold what we have and see how it plays out in the marketplace in terms of the pricing policies of the major cigarette companies.
In the meantime, I noticed that Philip Morris has the highest current yield of any Dow Jones industrial stock, about
5.7 percent, which is very high in general for stocks. And we think the company and its management are outstanding,
but they do have a problem. They've met it head-on. They are the leader in the industry; if anybody is going to survive
and prosper, they will. But we are concerned about how the pricing policies will affect earnings, and we're concerned
about the sin taxes, which will be coming forward here under Clinton's program.
Q. Are you worried about the recent Mississippi case in which a judge ruled cigarettes are inherently defective
products? That may create a new way for injured smokers to sue the manufacturers,
A. Ab: All I can say to that is, they never paid one dollar in damages. They have never paid one buck.
Q. Is Morris still your largest holding?
A. Ab: No, it isn't. The market took care of that. It's 2.7 percent of assets.
Q. One company Nicholas II picked up as a value, perhaps, is Sullivan Dental Products Inc., West Allis. What's up?
A. David: It's always been a very good company. It's been a 30 percent grower, and they're taking market share in
dental distribution. What happened was, they ramped up their SG&A in the first quarter...
Q. SG&A is?
A. David: Their selling, general and administrative expenses. And that penalized their earnings for the quarter.
Q. By pennies, right?
A. David: By a couple of pennies, right. But the stock was like 25 and it came down to 15, and that's when we
started buying it. And we think they will continue to take market share and do a great job, and they can control the
SG&A and get back to being, as projected, a 30 percent grower over the next three to five years.
Q. How much of a stake did you buy?
A. David: Probably 150,000 shares.
Q. What results might the '90s bring?
A. Ab: The 1980s were 18 percent compounded returns; we think the 1990s might be more like 10 percent compounded returns. Our goal has always been 15 percent. We're going to try to do that. And we are committed to smaller
and medium-size company stocks.
Q. Smaller companies because they can grow relatively faster than large ones?
A. Ab: And because the P/E ratio is now about the same as on large company stocks, where historically, that's
ranged between two and one. In other words, small company stocks can get up to twice the P/E ratio as large company
stocks.
But it's going to be a very competitive and a very challenging 10 years to try to perform the kinds of things we expected in the 1980s. We're just not going to have that in the 1990s.
Copyright 1993 UMI Inc.;
Copyright The Business Journal of Milwaukee Inc. 1993;
Business Dateline