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Ambitious Plans for U.S. Semiconductor Growth

Motley Fool - Thu Apr 18, 7:22AM CDT

In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:

  • The ambitious plans for U.S. semiconductor growth.
  • The challenges of building factories in Arizona.
  • If Jamie Dimon is the new Warren Buffett.

Deidre also chats with Motley Fool analyst Ron Gross about a look inside the minds of activist investors.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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Deidre Woollard: Getting hot in Arizona and it's not just the weather. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Jason Moser on this eclipse Monday, Jason, how are you doing?

Jason Moser: I'm doing really well. How are you?

Deidre Woollard: Good. Getting ready to watch the eclipse this afternoon. Got my glasses I'm all set. Interesting news day for us to go through, going to start off with early this morning, a little bit of an update on CHIPS Act, CHIPS Act such a huge impact on semi-conductor growth in the U.S., at least in theory so far. Money is flying everywhere. We already knew Taiwan Semiconductor was getting a lot of incentives to invest here in the U.S.. That pot just got bigger. Department of commerce announced an agreement with TSMC for a $6.6 billion subsidy that is going toward a third chip factory in Phoenix, Arizona. This is fascinating to me because, TSMC is going to be spending so much money on these facilities, but we've also seen a lot of delays. They're saying that by 2030 they're going to produce 20% of the world's most advanced semiconductors here in the U.S. That seem realistic?

Jason Moser: That's exciting. I certainly like the aspiration, set the bar high and try to get there. You'd see people like Elon Musk. I know people have opinions there as to how he throws those goals out there, but I do like setting the bar high and trying to reach it. Oftentimes maybe you don't and it doesn't work out, you still made a lot of progress. In this case, I think it's reasonable. There are plenty of things that could happen along the way. We're trying to see six or so years out, which is always difficult to do. Building these fabs is not easy. I found some interesting data. This comes from Intel, and clearly, they know a little bit about the space. Your typical fab, it includes 1,200 multimillion-dollar tools and 1,500 pieces of utility equipment and costs about $10 billion. Now this is your typical fab. I think these costs are going to start going up, but your typical fab costs around $10 billion, takes 3-5 years and 6,000 construction workers to complete. At the end of the day, you're using 35,000 tons of steel, which is 5 times the weight of the Eiffel Tower. Now, I don't know if you've been to the Eiffel Tower. Fortunately, I have been, that thing is a monster. That is just a lot. This is a really big task. In there are a lot of setbacks that can occur along the way. Disputes with labor, natural disasters, there's political wrangling, and general market conditions. It's difficult to fully predict out if we can hit that target, but I like setting the bar high.

Deidre Woollard: I love the stats you gave me there. One of them you mentioned construction workers. This is a big issue because what's happening in Arizona is population is booming and you're going to need all of these workers are needed. If it's temporary construction workers, you're going to need permanent workers, there's questions about how we train enough semiconductor workers to work in the factories for both Intel and TSMC. But the affordable housing issue in Phoenix is crazy because the population booming and you've also got some limits on the home building just because of groundwater access. There's a lot happening here. It feels like it's going to be a biggest strain on the infrastructure in Phoenix and surrounding areas.

Jason Moser: I think there's no question there. Going back and we talked about 606,000 construction workers in non Miami jogging that all in. It's going to be far more. It is going to put a strain on the infrastructure there, when you look at what's going on with housing in Arizona, in the Phoenix area, particularly, inventory is only one part of the problem. When it comes to housing and certain markets, you have to look at other factors. Clearly when it comes to Arizona natural resources is one of them, the water is not infinite, they do obviously depend on groundwater resources. I think they saw something where it's around 50% of their overall supply and then the rest comes from other alternatives there. When you look at the demands that will be placed on housing there, natural resources, that's just a really big part of the overall equation there. It's not a problem that's very easily solved. But it's going to be one that they have to come up with some creative solutions in order to be able to accommodate because building these plants as we've said, it's a really big undertaking.

Deidre Woollard: I think it's one of the things that I find fascinating right now. I find myself really nerding out on pretty heavily is things like data centers, issues of grid and water and power and I think it'll be interesting to see what Phoenix does. They've already done some interesting things to deal with the heat there in terms painting certain areas, painting streets white and experimenting with things like that. I think it's an interesting area to watch as microcosm for how we all deal with rising heat.

Jason Moser: It is. I think all of this begs the question, why build in Phoenix or why build in Arizona, why not go somewhere that maybe could support such an endeavor? There are some positives and there are a lot of positives that actually, when you look at Arizona, the state it's seismically, it's very stable. You're not going to witness a whole bunch of issues there in regard to seismic activity. It doesn't really suffer from hurricanes. You don't see the same type of activity with tornadoes and you said it in regard to the heat, there is just massive exposure to the sun. They're playing solar resources as well. The nice thing in regard to these fabs is typically they require a lot of water upfront, but then it doesn't keep a lot to keep it going. I've seen the comparison drawn before to a swimming pool. Where it takes a lot to fill it up. It requires a lot of water to get it going, but then once it gets going, it doesn't take a lot to keep it going. Then these fabs often have ways to continue recycling water limiting the use in regard to that natural resource. There are positives absolutely to building out there in Arizona, I understand why they're doing it. It just goes to show all of the different variables that go into this equation, and natural resources is a really big one.

Deidre Woollard: I'm going to take us in another direction because we've got the big bank earnings starting on Friday, but today we've got Jamie Dimon's annual letter to parse. He's the CEO of JPMorgan Chase, but he's also become a little bit of a soothsayer. I'd say people tend to pay attention to him because his view of the economy really matters. He tends to be, as I've said before, on the doomy-er side I would say.

Jason Moser: Maybe realistic. Maybe just more practical.

Deidre Woollard: I don't know because I think he over-indexes to doom, but we can chat about that.

Jason Moser: No, I think you're right.

Deidre Woollard: But I think one of the things that perked me up early in the letters, he talked about the impact of quantitative tightening. We've heard about quantitative easing for the last few years. He said this is draining over 900 billion in liquidity from the system. Another thing that he talked about was the role of his company as one of the guardians of the world financial systems. It seems to me he's trying to tell us a message of the next phase of the market is going to be very different, but he's there as the guardian of it all. What did you take from that?

Jason Moser: I really liked Jamie Dimon, I love he's just easy. He's very practical in nature. He just tells you like it is. He's not really trying to cupcake everything and make you feel a little bit better about things than they really are. I think he's right to be looking at things with some skepticism, not fully skeptical. But in the letter he said we may be entering, I quote, "we may be entering one of the most treacherous geopolitical arrows since World War II." That is a bold statement. That is something to keep in mind. You have everything from inflationary pressures at home to obviously conflicts across the globe that are keeping everyone's attention there. I think that Dimon is taking over. We've always talked about Buffett's letters. We know that won't last forever. I think Dimon is going to be the successor to that. What he says we pay a lot of attention to. I think it matters. When you when you read the letter, you see where he's talking about. These persistent inflationary pressures are talking about ongoing fiscal spending.

Jason Moser: Remilitarization of the world, restructuring of global trade, capital needs of the new green economy possibly higher energy costs in the future due to a lack of needed investment in the energy infrastructure. These are all really valid points, these are things that we're talking about all the time. These are things that need to be taken care of and we need the resources to take care of, those resources or capital. Bottom line, it starts to make me think that maybe 2% inflation target that we always hear so much about, I just don't think that's realistic anymore, I just it just doesn't seem realistic. Given the state of the world today, given where technology is going, we're making this new leap in AI is a big part of it as well. I just really wonder if that 2% inflation target is reasonable because that dictates so much of what is going on in the markets day-to-day. The headlines say it every day with 2% inflation, to preserve working, no rate cuts and no rate pushing whatever it's going to be but it all centers around that 2% inflation. It feels to me like we really need to take a step back and ask ourselves the question, is that even really realistic at this point in the game? Because the points he makes them that letter that I just noted are all very valid.

Deidre Woollard: Another thing that stood out to me in the letter and did he talked about this before, is this ongoing shrinking of public markets and the rise of private equity which he sees as having a lot of long-term threats and he also talked about just the way that markets are and how the role of proxy statements and who's making the decisions. It's really interesting because we have more money, I'd say in the public market than ever before but we've also got this level of concentration that has has an impact as well so that was a that was another thing that stood out to me.

Jason Moser: Concentration is a risk for investors and we've talked a lot about the magnificent seven recently and the role they've played in the rising tide. Always something to keep in mind, it was really interesting to note and the letter he quoted that from the peak in 1996 you had 7,300 US public companies, now we have 4,300 and he feels that total should have grown dramatically not shrunk, so that's a big delta there. Now he does mention some of the benefits for companies staying private longer, they can raise more and different types of capital as he puts it. But it seems the fears outweigh the positives, it's something where you have companies, they don't go public or they wait to go public. A lot of those opportunities they go public eventually but they're so big, then a lot of the opportunity is lost for public investors. You see some of these companies that Uber stands out as one, it didn't nice if that was available to public markets a lot sooner, I understand why it wasn't. But his point is understandable, I think as with most things in life it's nice to have more choices as opposed to fewer and when we see many of these companies stay private for longer, it really does impact that that growth in the future.

Deidre Woollard: Thanks for your time today, Jason.

Jason Moser: Thank you.

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Deidre Woollard: Activist investors have been in the news a lot lately but who are the shadows pictures and what value can they bring to accompany? Up next I talk with Ron Gross for a peek inside the minds of activist investors and hedge funds.

Activist investors, we love to hate them sometimes maybe we hate to love them, there are so many names, there's Bill Ackman, Carl Icahn, Nelson Peltz certainly lately. Today we're going to draw back the curtain a little bit on these sometimes shadowy figures, what they mean for our investments, I'm here today with Ron Gross, our Director of us investing at The Motley Fool. Weapons, also happens to have quite a bit of experience in this realm, welcome Ron, how are you?

Ron Gross: I'm good Deidre, how're you? Am I shadowy? I'm not shadowy, maybe back in the day. Maybe not now, before.

Deidre Woollard: Maybe you were but now now your full-year, you're out in the light. I wanted to start with the basic definition of an activist investor because it's more than someone who just buys up a lot of shares?

Ron Gross: For sure, you're bringing me back to the good old days, Deidre, I was a value-based hedge fund manager for about eight years and we often used an activist strategy to enhance some using quotes there to enhance the value of the companies we invest it in. An activist investor, typically a hedge fund, although mutual funds have been more involved over the years whereas in the old days they would almost never be involved but typically a fund of some sort that advocates for some type of change to a public company in order to improve that value. The fund as you said often has a large stake in the company, it is recommending change in for two main reasons. One, so the fund makes a fair amount of money, the activist campaign is successful. This is a capitalist, this endeavor, let's pretend, not pretended is not. But to own a large position makes it easier for the activists to throw their weight around in a proxy fight for board seats, for example and in some other ways if they already own a large voting block that helps and they can also demonstrate they have significant skin in the game. As you mentioned earlier, the managers of these funds, they often become pretty famous or maybe infamous. Not me, but some of the bigger ones for sure become famous because these are pretty vocal these campaigns and they're often contentious and they often end up in a courtroom sometimes. Unless the activist and the management team and the board of directors can come to some agreement, this usually gets played out in the public, in the press and that's how these folks become famous.

Deidre Woollard: I want to first contrast this though with a short report because it's similar but it's also the opposite because the short report and entities buying up shares to short and then they'll publish report on all the things they found and sometimes they're really concerning and sometimes there, maybe less so. But the activist seems the opposite, like they come in, they see something wrong and they think they can fix it. Is that an active of hubris to me to think that you can fix it, what do they think they're seeing that the company itself is missing?

Ron Gross: Well, first let's suggest what you said about short-sellers and I think you nailed it there. Short sellers and activists are pretty different in my mind. An activist wants the stock to go up.

Deidre Woollard: Yes.

Ron Gross: Which should benefit all shareholders not just the activist. A short seller actually wants the stock to go down benefiting them but hurting all the owners of the stock who are long the stock. Short sellers are often much more short-term in nature versus the activists who can own shares in the company for a very long period of time especially if they get seats on the board. Activists should theoretically benefit all shareholders, short sellers typically just benefit themselves.

Deidre Woollard: Very important distinction.

Ron Gross: Wall Street is filled with it.

Deidre Woollard: Yes.

Ron Gross: Those who think they can beat the market can generate outsized returns over time and some can. We certainly think Foolish investing principles can help in that regard. But yes, there is a certain amount of U-verse when you think you have the ability to identify a problematic company and you have the solution to improve the problem. Short sellers with long track records have often proved that they do have those abilities. Others, perhaps not so much. You need to measure these folks over long periods of time because by no means every activists campaign successful. You're going to have some clunkers and you're going to have some winners. Not all of the campaigns, the platforms, if you will are as strong or successful as the next. You need to be a little careful there but yes it's tough. You not just identifying and analyzing a company like you would if you were a typical long-only equity investor. You're identifying problem and you're identifying a solution and that adds a whole layer.

Deidre Woollard: Tell me a little bit about that. You've worked in a hedge fund as you mentioned so you would identify a company that wasn't performing where you thought it could. Then you have to work with your team to figure out can it be fixed? If it can be fixed what is the process? How did you start by identifying companies?

Ron Gross: There's both heavy financial as well as an operational component to research and companies in the activists world. Because you need to think about what needs to be improved, how it should get done, and what the impact will be on valuation. It really helps to actually have a strong advisory board that has expertise across a wide range of industries. Because if I'm trying to develop a plan, operational plan or strategic plan for an industry that I don't really know very well. If I can turn to someone on my advisory board who has maybe been in that industry it helps immensely. Because we're talking about operational improvements it's very often here, not just capital allocation or stock-based improvements. True operational improvements and those are sometimes hard to identify if you're a generalist or you really are not integrally involved in the industry. Once you identify what needs to be done that's really the first step then the activism is what kicks in. The research is the first part, the activist is the second and you present often to management these actions that you want them to take. But it's often very difficult for management to pull the trigger on. They sometimes need a push.

Boards of directors are often ineffective in providing that push there either entrenched or the status quo is more along the lines of what they're used to. That pusher changes the activism that comes in and it could be around a variety of things. A significant cost cutting is very often a platform of an activist investor. Maybe even the divestiture of an entire subsidiary which would take a little bit of a bigger push than just cutting costs. Often corporate governance is a very big platform for activists investors so enhancing the board with new members, splitting the CEO and chairman roles, declassifying or de-staggering the board so all board members come up for reelection at the same time. Or it could be a capital allocation change. You want them to start paying a dividend. You want the company to start buying back stock. All of these platforms are one or more you'll typically see an activist put forth and done correctly. As I said earlier it should be a shareholder-friendly endeavor management that might not like it, but if it's successful and the stock goes up that would be to the benefit of all shareholders not just the activist.

Deidre Woollard: Could benefit management in the long run they're definitely owning shares as well. I love that you laid out that menu there because I've seen variations of that menu come up so many times in companies that have seen an activist attention. I want to go back to the basics, you mentioned earlier the news coverage. Generally if I'm owning a stock I'm probably finding out in the news so and so took a steak, because I'm not usually just coming across it in the SEC filings or anything like that. When you get that moment what's the first thing you do?

Ron Gross: In order to identify if you like what you're seeing in the press you probably first have to define who is the activist?

Deidre Woollard: Yes.

Ron Gross: What is their track record? How much stock do they own? If the platform they put forth has some good points. You have to know the company were relatively well to be able to understand that but sometimes the activist can put forth a presentation in such a manner that it really lays out and helps you understand what they're looking to get done. You can come to a conclusion whether you agree with that or not. If you accumulate more than 5% of a public company then you need to file a form with the SEC. As you just said that there might not be something that crosses your radar, you would probably more readily see an activist in the press or in a press release or in the news. But you file a 13G skits in the weeds but it might be interesting. A 13G if you have a passive stake in a company you just happy to own a big chunk of accompany and you're going to let management do what they do. But if you intend to be active you have to file a 13D. In the 13D often accompanies a presentation or a letter to management outlining the activist platform or agenda. It doesn't always but it typically does or at least that platform is going to become coming soon. That's where you can then dig in. If it's a PowerPoint presentation, awesome. If it's a letter, that's fine too. But you can then start to get a sense. What are they looking to do here is it's simply buy back stock and pay a dividend? Or are we doing a whole strategic overhaul of the company which is obviously harder to understand and harder to analyze. But it also can be more effective than something simple like you should buy back some stock.

Deidre Woollard: Is there is sometimes a lag? I feel like I've noticed a lag between I see it reported in the press and the plan comes out. In that space is there sometimes a little bit of confusion in the market of not knowing so and so is taking a stake we don't know what they want to do.

Ron Gross: I think we've seen that recently. I want to stay with Elliott and Match Group. They don't put forth right-of-way. Forgive me if I'm remembering that specific campaign incorrectly, but it doesn't always get outlined right there in the SEC filing. They give some time. Sometimes there's once you file the 13D every time you start to communicate with management about something you want them to do, you have to make that communication public. That's where the flow of information then starts with every amended 13D. Every time you write a letter to management, every time you meet with management, you have to let the public as to what went on and what was said and what you are looking to have done. But there can be a lag and when there's a lag that's where you can say, who are the activists? What are their track records? Are they typically long-term shareholders? Are they in this for a quick buck? They're in and out? Or do they tend to stick with companies perhaps for years and years to come especially if they get board seats.

Deidre Woollard: That's the moment when the theater begins. This is when we get the public letter maybe we get a whole website like you mentioned, the PowerPoint presentation. The activist isn't just revealing their intentions they're also appealing to an audience of shareholders. They want people to go in with them especially if it's a proxy fights. These are tricky because I feel I don't always know what to think. You see this website and it says a lot of things and maybe some of the things you've been thinking but maybe it hasn't. As an investor how do you deal with that? How do you understand keep it in your mind that it it is a campaign in a way? It is a form of marketing and public relations from the activist really.

Ron Gross: It absolutely is. The real goal is to come to an agreement with the company so they'll execute on some of your ideas whether it's to give you board seats or to cut costs or whatever the idea is because to make it contentious to do a proxy fight to maybe even get into litigation. It's not only time-consuming, it's costly and doesn't always succeed. The goal is to come to some agreement. Sometimes management and the board of directors will do so if they feel it's in the best interests of the company or at least let's hope that's why they would agree because they feel it's in the best interests of the company. But you really have to dig in and we see it with Disney. Disney is so in the news and it's such a big company and it's such a part of our culture that gets a lot of attention. But it's the lesser-known companies, the railroads, the industrial companies, the smaller retailers, where it's often activists coming in and saying I need to get this done, this done and this done. If you do it your stock's going to go up 25, 35, 45% because you're not appropriately running this company, your evaluation in the public markets is too low and it could be higher if you execute on our plan. Then management's as well I disagree or management as I agree with some things but not others. Hopefully, there can be a meeting of the minds if not that's where you get continues.

Deidre Woollard: As always people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against so don't buy yourselves stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Deidre Woollard has positions in JPMorgan Chase and Walt Disney. Jason Moser has positions in Walt Disney. Ricky Mulvey has positions in Taiwan Semiconductor Manufacturing and Walt Disney. Ron Gross has positions in JPMorgan Chase, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool has positions in and recommends JPMorgan Chase, Match Group, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

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