September’s massive rally in Intel (INTC), a Cabot Turnaround Letter portfolio holding, did more than just underline the just-announced $5 billion stake that Nvidia (NVDA) initiated in the company. It also highlighted the degree to which growing federal investment in tech- and defense-related companies—particularly those used to enable AI and other “mission-critical” applications—has been driving the seemingly endless rallies of many leading tech sector stocks.
Indeed, one could argue that the government’s direct, and indirect, involvement in certain companies that help form the backbone of both the nascent AI paradigm, as well as the rapid expansion of the defense sector, is providing a backstop for investors in certain stocks—an implicit government-backed guarantee somewhat comparable to that of Treasury inflation-protected securities (TIPS).
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Granted, the above statement is rhetorically strong, and I certainly am not suggesting that the government’s recent equity stakes in Intel and MP Materials (MP) are perfectly analogous to that of a Treasury bond in terms of a financial risk guarantee. But putting aside the political debate the public/private partnership subject has engendered, it’s hard to deny that having government as a financial backer is a powerful argument for individual investors maintaining a long position in such equities.
For one, the government is undeniably acting in some cases almost like a backstop by locking in revenues, helping de-risk certain companies or sectors and ensuring strategic supply chains, notwithstanding certain limits. Specifically, those limits include: 1) A restraint on the government’s governance rights of the companies; and 2) operational, market and regulatory risks that might still exist despite the government’s presence.
While the ostensible reason for Intel’s 48% rally this month was the Nvidia deal itself, the unstated implication was (as some analysts have suggested) that Nvidia was tactically pushed by the government to make the deal. Per a Seeking Alpha analyst report from the group Tech Stock Pros:
“We suspect Nvidia is trying to appease the Trump administration, which already has a stake in Intel, in return for potentially getting approval on the B30A sale to China and an overall smoother negotiation with [Chinese President] Xi on [Friday’s] call. The deal carries far greater weight for Intel, as it could help revive the company’s competitive edge against AMD and potentially lead to higher pricing power and market share.”
Although the Intel and MP Materials deals are the only two direct government investors in publicly traded companies to date, the White House has hinted that similar stakes are possible in the near future. White House Economic Advisor Kevin Hassett said that the government’s equity stake in Intel is part of a “broader strategy” and that similar transactions in other companies are possible. “I’m sure that at some point there’ll be more transactions, if not in this industry [semiconductors] then other industries,” he told CNBC last month.
On that score, the U.S. Department of War (formerly known as the Department of Defense) in January released its fiscal 2025 “investment strategy” outlining how it will use its authorities (including loans, guarantees and credit-based financial products) to support companies in “critical” tech or supply chain segments. According to the document, industry segments of “particular interest” for the federal program include:
“…advanced bulk materials; advanced manufacturing; autonomous mobile robots; battery storage; biochemicals; bioenergetics; biomass; hydrogen generation and storage; microelectronics assembly, testing, and packaging; microelectronics manufacturing equipment; microelectronics materials; nanomaterials and metamaterials; sensor hardware; spacecraft; and synthetic biology.”
This list, I maintain, can be taken as a veritable “cheat sheet” as to which segments of the market investors should be focused on going forward. And perhaps not surprisingly, most of the aforementioned industries have posted excellent returns in the year to date.
Aside from direct private sector investments, the issue of strategic minerals/materials was also underscored recently when the Secretary of the Interior added silver to the existing U.S. List of Critical Minerals (LCM). The parameters of this list include materials that: 1) might become unavailable due to trade disruption, 2) rely on a sole producer and 3) play an outsized role in the economy—particularly the defense sector.
As one commentator has noted, “This is an important change that could have important implications for silver prices in the weeks and months ahead.” I agree with this assessment, and I also believe it was a catalyst behind the recent rally to new highs in another of our portfolio holdings, Pan American Silver (PAAS).
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