Chip Stocks: An Investment Area Where Politics Matters

I have repeatedly said that anyone who makes investment decisions based on their own partisan political biases is a fool. It is a folly practiced by both sides of the political divide. There were a lot of people who sold out after Barack Obama was elected, based on the image of him as a “radical socialist” that was so popular in the right-wing media. They missed one of the biggest eight-year stretches in stock market history.

There were also people who sold out when Trump was elected, believing what they heard in their own echo chambers that he was a serial bankrupt who would fail America just as he had so many of his own businesses. They also missed the mark as the stocks posted historic gains from 2017 to 2019.

Even more damaging than partisanship is basing discussions on what politicians say they will do or what commentators say politicians will do. There are those, for example, who bought large stocks of oil when Donald Trump was elected because he was pro-fossil energy. They were killed: XOM fell from around $84 after the 2016 election to around $32 in the 2020 election, a 62% loss in a period when the S&P 500 gained more than 60%. Since “anti-oil” Biden was elected, however, that headline has gained more than 160%.

In short, no matter how you align yourself politically, it is not wise to invest on this basis.

However, that doesn’t mean you should completely ignore politics. When politicians go from while speaking about something to really who passed legislation, it can have a strong influence on specific industries. Free-market purists might argue that any law that distorts market influences is harmful in the long run, but government favor (and, of course, government money) can give industries a boost that lasts a lifetime. decade or more.

So with that in mind, the question becomes, why are US chip stocks still languishing?

Two weeks ago, President Biden signed into law the CHIPS Act, legislation that attempts to address the fact that only about 10% of semiconductors are made in the United States. In an increasingly technology-dependent world, this represents a security risk as well as a missed economic opportunity, which is likely why the bill has received bipartisan support.

One could, of course, argue that handing over $10 billion to $15 billion to companies like Intel (INTC) and Micron (MU), which made profits of $43.8 billion and $5.9 billion respectively l Last year, when there is real poverty in America or massive government debt, is not the best use of resources. But that’s a discussion for another time and place, and indeed it goes back to my earlier point about investing based on your political outlook.

Instead, my job is to look at how this sort of thing specifically affects stocks. From this point of view, this has created a great opportunity in the two aforementioned companies; analysts at Bank of America and Piper Sandler, among others, see MU and INTC as two of the biggest beneficiaries of the CHIPS Act. Since the law was signed into law on August 9, however, the two stocks have barely moved, underperforming the S&P 500 as they have:

UM Chart

I understand these are growth-sensitive stocks and the global outlook isn’t too good right now, but they’ve been given a big competitive advantage, and the stocks just don’t reflect that at these levels. And by the way, if you think the grants under the CHIPS Act are way too high now that the industry has been recognized as strategically important, or that all they get is that upfront sum, think again. If you doubt me, keep in mind that the energy sector, according to a IMF reportreceived $5.9 trillion in grants in 2020!

History tells us that once the dam is broken and industries receive government subsidies, the amount of money they receive tends to increase. With such room for market share expansion and with the government money spigot opening, buying stocks like INTC and MU at what may well be near the bottom of the cycle in a very cyclical looks like a good long-term play for investors. .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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