Motley Fool Hidden Gems Investing - If You Build It, Chips Will Come

Episode Date: April 8, 2024

Tawain Semiconductor’s plans for Arizona factories just got a bit bigger. (00:21) Jason Moser and 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. (13:18) Deidre Woollard talks with Ron Gross for a look inside the minds of activist investors. Companies discussed: MTCH, INTC, TSM, JPM Host: Deidre Woollard Guests: Ron Gross, Jason Moser Producers: Mary Long, Ricky Mulvey Engineers: Tim Sparks, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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eclipse monday jason how are you doing i'm doing really well how are you Good, 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. You know, Chips Act, such a huge impact on semiconductor growth in the U.S., at least in theory so far. I mean, money is 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, I mean, TSMC is going to be spending so much money on these facilities, but we've also seen a lot of delays. So they're saying that by 2030, they're going to produce 20% of the world's most advanced semiconductors here in the U.S. Does that seem realistic? 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, but you've 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 sieve 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. Clearly, they know a little bit about the space. Your typical fab includes 1,200 multimillion-dollar tools and 1,500 pieces of utility equipment. It costs about $10 billion. Now, this is your

typical fab. I think these costs are going to start going up. Your typical fab costs around $10 billion, takes three to five years and 6,000 construction workers to complete. And at the end of the day, you're using 35,000 tons of steel, which is five times the weight of the Eiffel Tower. Now, I don't know if you've been to the Eiffel Tower. Unfortunately, I have been. That thing is a monster. I mean, that is just a lot, right? So, this is a really big task. And there are a lot of setbacks that can occur along the way, right? I mean, disputes with labor, natural disasters, there's political wrangling, general market conditions. So it's difficult to fully predict out if we can hit that target, but I like setting that bar high.

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. You're going to need 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 home building just because of groundwater access. So there's a lot happening here. It feels like it's going to be a big strain on the infrastructure in Phoenix and surrounding areas. I think there's no question

there. Again, going back, we talked about 6,000 construction workers. If you're talking about 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 in certain markets, you have to look at other factors. Clearly, when it comes to Arizona, natural resources is one of them. I mean, water is not infinite. They do obviously depend on groundwater resources. I think I saw something where it's around 50% of their overall supply, and then the rest comes from other alternatives there. But yeah, 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. Yeah, I think it's one of the things that I find fascinating right now, and I find myself really nerding out on pretty heavily, is things like this, things like data centers, issues of grid and water and power. And I think it'll be interesting to see what Phoenix does. I mean, they've already done some interesting things to deal with the heat there in terms of like painting certain areas, painting streets white and experimenting with

things like that. So I think it's an interesting area to watch as sort of microcosm for how we all deal with rising heat. It is. And I think all of this kind of begs the question, well, why build in Phoenix or why build in Arizona, right? I mean, why not go somewhere that maybe could support such an endeavor? And I mean, there are some positives and there are a lot of positives, actually. When you look at Arizona, I mean, the state, it's seismically, it's very stable, right? I mean, you're not going to witness a whole bunch of issues there in regard to seismic activity. It doesn't really suffer from hurricanes, right? You don't see the same type of activity with tornadoes. And you said it in regard to the heat. I mean, there is just

mass, massive exposure to the sun, right? So there are plenty of solar resources as well. And the nice thing in regard to these fabs is typically they require a lot of water up front, but then it doesn't keep a lot to keep it going. I've seen the comparison drawn before to like a swimming pool, where, yeah, 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. And then these fabs often have ways to continue recycling water and 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 in natural

resources is a really big one. 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 Diamond'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 and he tends to be as i've said before on on the doomier side i would say but i want to talk about realistic right maybe he's just more practical i don't know because i think i think he i think he oh i think he over indexes to to doom but but we can chat about that no i think you're right i think you're right but i think one of the things that that sort of perked

me up early in the letters. He talked about the impact of quantitative tightening, right? We've heard about quantitative easing for the last few years. And he said, you know, this is draining over 900 billion in liquidity from the system. And another thing that he talked about was the role of his company as one of the guardians of the world financial systems. So it seems to me like he's trying to tell us a message of like the next phase of the market is going to be very different. But, you know, he's sort of there as the as the guardian of it all. What did you take from that. I really like Jamie Dimon. I mean, I love his easy sort of, he's very practical in nature. He just tells you like it is, right? He's not really trying to cupcake everything and make

you feel a little bit better about things than they really are. And I think he's right to be looking at things with some skepticism. I mean, not fully skeptical, but in the letter, he said, we may be entering, I quote, I mean, we may be entering one of the most treacherous geopolitical eras since World War Two. I mean, that is that that's a bold statement. Right. And so that is that is something to keep in mind. And when you have everything from inflationary pressures at home to to obviously conflicts across the globe that are that are keeping everyone's attention there. And I think that Diamond is kind of taking over. We've always talked about Buffett's letters, right? And we know that won't last forever. I think Diamond is going to be kind of the

successor to that. I mean, what he says we pay a lot of attention to, I think it matters. And so, when you read the letter, you see where he's talking about, there are these large, persistent inflationary pressures, talking about ongoing fiscal spending, 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 them. Those resources are capital. Bottom line, it starts to make me

think that maybe that 2% inflation target that we always hear so much about, I just don't think that's realistic anymore. It just doesn't seem realistic. Given the state of the world today, given where technology is going, we're making this new leap, and 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, right? I mean, the headlines say it every day, 2% inflation, no rate cuts and no rate push and 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 in that letter that I just noted are all very valid. You know, another thing that stood out to me in the letter, and he's 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, you know, just the way that markets are and how, you know, the role of proxy statements and how, who has, who's making the decisions. So 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, you know, has an impact

as well. So that was another thing that stood out to me. Yeah. I mean, concentration is a risk for investors. I mean, 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. I mean, it was really interesting to note in the letter he quoted that from the peak in 1996, he had 7,300 U.S. public companies. Now we have 4,300. And he feels like that total should have grown dramatically, not shrunk. So That's a big delta there, right? 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 like the fears outweigh the positives. It's something where you have companies that don't go public or they wait to go public. A lot of those opportunities 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, Uber stands out as one. It'd be 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. When we see many of these companies that stay private for longer, it really does impact that growth in the future. Thanks for your time today, Jason.

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Sign up for exclusive access today, rippling.ai slash fool. Activist investors have been in the news a lot lately. But who are these shadow figures? and what value can they bring to a company? 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 U.S. Investing at The Motley Fool, who also happens to have quite a bit of experience in this realm. Welcome, Ron. How are you? I'm good, Deidre. How are you? Am I shadowy? I'm not shadowy. You're not shadowy. Maybe I was back in the day. Maybe I'm a fool. Maybe you were, but now you're a fool. You're out in the light. So I want to start with the basic definition of an activist investor, because it's more than someone who just buys up a lot of shares, right? Right, 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. We often used an activist strategy to enhance, I'm using quotes there, to enhance the value of the companies we invested 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, I think, two main reasons. One, the fund makes a fair amount of money if the activist campaign is successful. This is a capitalist endeavor, let's not pretend it is not. But two, owning 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. And 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. So unless the activist and the management team and the board of directors can come to some sort of agreement, this usually gets played out in the public, in the press, and that's how these folks become famous. I want to first contrast this, though, with, with a short report, because that's, it's sort of similar, but it's also sort of the

opposite because the short report identity is buying up shares to short, and then they'll publish a report on all the things they found. And, you know, sometimes they're really concerning and sometimes they're maybe less so, but the activist kind of seems like the opposite. Like they come in, they see something wrong and they think they can fix it. Is that kind of an act of hubris to me to think that you can fix it. What do they think they're seeing that the company itself is missing? Yeah. Well, first, let's address 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, 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 a 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. Yeah, very important distinction. To your comment about hubris, Wall Wall Street is filled with it. 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 hubris when you think you have the ability to identify a problem at a 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 are every activist campaign successful. You're going to have some clunkers and you're going to have some winners. Not all of the campaigns, 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're not just identifying and analyzing a company like you

would if you were a typical long-only equity investor. You're identifying a problem and you're identifying a solution, and that adds a whole layer. Tell me a little bit about that. You've worked in a hedge fund, as you mentioned. would identify a company that wasn't performing where you thought it could, and 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? Yeah. There's both a heavy financial as well as an operational component to researching companies in the activist world. 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 an operational plan or a 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, talking about operational improvements very often here, not just capital allocation or stock-based improvements, true operational improvements. Those are sometimes hard to identify if you're a generalist or you really are not intricately 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 activism is the second. You present often to management these things, 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. They're either entrenched or the status quo is more along the lines of what they're used to. That push or change is the activism that comes in. It could be around a variety of things. 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 activist investors. 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 or one or more, you'll typically see an activist put forth. Done correctly, as I said earlier, it should be a shareholder-friendly endeavor. Management 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. Yeah, it could benefit management in the long run. They're definitely owning shares as

well. So yeah, I love that you laid out that menu there because I've seen, I've seen variations of that menu come up so many times in companies that have seen, seen activist attention. I want to go back to the basics of if you mentioned earlier, the news coverage. So generally if I'm owning a stock, I'm, I'm probably finding out in the news. So-and-so took a stick because I'm not usually like just coming across it in, in the SEC filings or anything like that. So when, when you, when you get that moment, what's the first thing you do? In order to identify if you like what you're seeing in the press, you probably first have to define who is the activist. What is their track record? How much stock do they own? And if the platform they put forth has some good points.

You have to know the company 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. And you can kind of 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. And as you just said, that 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, this gets in the weeds, but it might be interesting. A 13G, if you have a passive stake in a company, you're just happy

to own a big chunk of a company and you're going to let management do what they do. But if you intend to be active, you have to file a 13D. And 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. And 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 kind of then start to get a sense, okay, what are they looking to do here? Is it 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, hey, you should buy back some stock. So, is there sometimes a lag? I mean, I feel like I've noticed a lag between, I see it reported in the press and the plan comes out. And so, in that space, is there sometimes a little bit of confusion in the market of not knowing like, okay, so-and-so is taking the stake. We don't know what they want to do. Yeah, I think we've seen that recently. I want to say with Elliott and Match Group, they don't put it forth right away. 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. Once you file the 13-D, 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 13-D. Every time you write a letter to management, every time you meet with management, you have to alert 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. When there's a lag, that's where you can say, okay, 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 to come, especially if they get board seats. So that's sort of the moment when when the theater begins.

This is when we get the the public letter. Maybe we get a whole website like you mentioned, the PowerPoint presentation. You know, the activist isn't just revealing their intentions. They're also they're also appealing to an audience of of shareholders. And they want, you know, they want people to go in with them, especially if it's a proxy fight. So these are tricky because I feel like I don't always know what to think. You see this website and it says a lot of things and maybe it's some of the things you've been thinking, but maybe it hasn't. So as an investor, how do you deal with that? And how do you understand, keep it in your mind that it is a campaign in a way? I mean, it is a form of marketing and public relations

from the activist, really. It absolutely is. And 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. So the goal is to come to some sort of agreement. And sometimes management and the board of directors will do so if they feel it's in the best interest of the company, or at least let's hope that's why they would agree, because they feel it's in the best interest of the company. But you really have to dig in. And we see it with Disney, where Disney is so in the news,

and it's such a big company, and it's such a part of our culture, that 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. And if you do it, your stock's going to go up 25%, 35%, 45%, because you're not appropriately running this company. Your valuation in the public markets is too low, and it could be higher if you execute on our plan. And then management says, well, I disagree or my interest is I agree with some things, but not others. Hopefully there can be a meeting of the minds. If not, that's where you get contentious. As always, people on the program

may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Deidre Wollard. Thanks for listening. We'll see you tomorrow. Thanks for watching!