Different investors pursue different strategies to try to make the most profit. Over the years, I’ve seen many interesting ideas, but one came across my desk this week that made me both smile and think. It revolves around US stocks in the S&P 500 and is one I think all investors can consider!
The backstory
The idea stems from the recent events with Intel (NASDAQ:INTC). Back in August, Intel announced that the US government would acquire a 9.9% equity stake. This was mainly financed from the government converting unpaid or promised grants. However you spin it, the government now has a passive stake in the company.
When I look at Intel, it does make sense. Having domestic chip-making capacity is a national priority for America. Intel is arguably the only semiconductor company that does leading-edge research and development, along with some manufacturing in the US.
It therefore serves the purpose for both sides. The government get some support in reducing reliance on foreign companies and related countries. As for Intel, it’s well known that it has struggled competitively and financially in recent years. The deal gives Intel a significant boost, along with the ability to expand its US manufacturing.
The numbers add up
Let’s take it one step further. Based on the government’s price, it’s already up 94%. If an investor bought Intel shares when it was announced, they would be up 59% in just two months!
Over the past year, Intel is now up 84%. So a good portion of the move over this period has come since the August announcement. This highlights the unique strategy of considering buying US stocks in which the government has taken a stake.
To be clear, I’m not suggesting blindly buying the stock. There have been occasions when government investments have backfired. For example, back in 2009 a 61% stake was taken in General Motors. When this was sold in 2013, the administration actually lost money to the tune of around $10bn!
Instead, when a deal is announced, an investor can do their own research and assess whether the government’s commitment could be a material boost to the company. If it could (as with Intel), then it may be worth considering for a portfolio.
On the other hand, if an investor doesn’t fully understand the business or the stock is too risky for their tolerance, then it can be passed on. The notion of a new equity stake by the administration is more of an alert, so that when the headline breaks, it’s an opportunity for an investor to do some digging.
Final thoughts
The idea of researching stocks after it’s announced that the government is involved could provide potential investment opportunities. After all, it should benefit from preferential treatment from the administration. However, there are risks.
There coudl be changes in government policies, of course. And with Intel, it still has to deal with a hyper-competitive industry. Even with government support, it could still lose out on market share outside of America. It could also face limited strategic flexibility, as it may be under pressure to act in a certain way.
Even with these concerns, I think it’s a really interesting strategy for investors to consider. As for Intel, it’s an example also worth thinking about for a portfolio.
