THE MILLEGAN MEMO: FEBRUARY 2025
Brought to you by The Woodworth Contrarian Fund
(Pok Rie “Intel” 2018)
Intel’s potential breakup has the company poised for exciting times, Stellantis earnings show a strong balance sheet, and the yield curve partly inverts as recession fears loom.
- Managing Partners Drew Millegan & Quinn Millegan
“Bargain prices do not occur when consensus is cheery, the news is good, and investors are optimistic.”
INTEL BREAKUP: THE NEW TAIWAN SEMICONDUCTOR?
(Pok Rie “Intel” 2018)
Broadcom and Taiwan Semiconductor are potentially exploring bids to split American chipmaker, Intel, according to the Wall Street Journal. This led to a mid-month rally for INTC - over 16% on Tuesday the 18th, its best day since March of 2020. Intel has fallen behind as its chipmaking competitors benefit from artificial intelligence tailwinds. Broadcom (AVGO) is interested in Intel’s chip-design and marketing side of the business, while Taiwan Semiconductor (TSM) has studied taking over some or all of Intel’s chip manufacturing plants. These chipmakers are allegedly not working together on these deals.
Intel could likely do quite well after a breakup. The company has struggled in recent years due to stiff competition and stagnating progress at the chip giant that has been so ubiquitous for decades. The company’s chip manufacturing arm began operating as if it were a separate business in 2022, putting its own design team’s orders on equal ground as outside orders. In our opinion, Intel’s chip manufacturing arm could become an extremely valuable business if it were independent. We are not surprised that TSM is looking at taking control, as it has the potential to become a large TSM competitor. The beauty and value of TSM is that they do not design their own chips - every chip manufacturer trusts TSM to build their designs without fear of being duplicated or stifled. TSM then benefits from economies of scale with the ability to be trusted by chip designers far and wide with great margins. There seems to be a great case for this split, even without outside buyers.
STELLANTIS REPORTS EARNINGS SLUMP AND POSITIVE OUTLOOK
(Sandhu “Jeep Wrangler Crossing at Dusk” 2024)
Stellantis misses on second half 2024 earnings results. Stellantis, a multinational manufacturer of such brands as Dodge, Jeep, Ram, Maserati, Fiat, Alfa Romeo, Lancia, and Peugeot, was created in 2021 from a 50-50 all-stock merger of the Italian-American company Fiat-Chrystler (FCA) and France’s PSA Groupe (PSA). This merger formed the world’s fourth largest automaker, and if many have likely never heard of Stellantis itself, many more would recognize the pedigree of their car brands. Stellantis reported just €0.08/shr adjusted for the second half of 2024 compared to street expectations of €0.18/shr, and top line revenues of €71.86 Billion compared to expectations of €73.85 Billion. Having recently lost its CEO, the company has also come under speculation of what impact US tariffs will have on their bottom line, in addition to working through production gaps in major car model offerings.
Company in transition. It really has been a rough year for Stellantis. As recently as early 2024 the FCA-PSA merger and corporate rebranding appeared to be a great success, with operations and sales all over the world benefiting from the efficiencies that come with removing redundancies against larger revenues. Unfortunately, the company underperformed its peers in sales in the first half of 2024 as it built up record-high inventories at its factories and partner dealerships, which it has spent the entire second half of 2024 working through. This is in addition to contending with temporary production gaps in their portfolio of brands as they transition to new models - a near perfect storm of bad news. Still the company has solid finances to build off of, and if the company can successfully bridge the gap to the new lineup of models such as Jeep and Ram, the company has real potential to turn around in 2025. They are also going to transition to regular quarterly earnings in 2026, versus their current confusing system of half year reporting and mid-half semi-reporting. Even considering potential tariff impacts, the company is relatively insulated from such costs by both its globally-distributed customer base and region-specific manufacturing base.
Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of STLA as of the publication date of this article.
RECESSION INDICATOR FLASHES AGAIN
(FRED 10 Year minus 3 Year Treasury Chart 2021 to Date)
10-year treasury yield dips below 3-month note yield. The spread between the yield of US government debt of different maturities just flipped, following a long period of normalization. The last time this occurred was in October 2022 along with the more watched 2-year note versus 10-year bond spread - a time when many bond market watchers were forecasting an imminent recession that never materialized. A yield curve is said to be “normal” when longer-term government debt yields are higher than shorter-term debt. When this plotting of debt yields “inverts” (short term rates yielding more than long-term rates), this is typically an indicator that the bond market expects interest rates to drop in the near future, which in turn is highly correlated with recessions.
Inversion is often correlated with a weaker economy, but not always. Investors more closely watch the 2-year yield compared to the 10-year, so while the 3-month dipping below the 10-year is notable, it is not necessarily cause for alarm yet. It is also important to note that, while the bond market is relatively reliable as a forward indicator of economic activity, it is not 100% reliable in predicting future economic outcomes. As mentioned, the 2-year note last inverted relative to the 10-year bond back in October 2022, and yet the economy remained broadly strong through to the present day, with low unemployment and GDP growth consistently outpacing the rest of the world. This may be due to the fact that, at its core, the yield curve is a predictor of interest rates and not of the economy directly. Although rare historically, it has happened that interest rates have dropped without a recession, as the Federal Reserve has gotten much better at intervening with the so-called “soft landing” of managing its dual mandate of low unemployment and stable interest rates without causing too much collateral damage.
(FRED 10 Year minus 2 Year Treasury Chart 2021 to Date)
Compared to when the Federal Reserve came into existence, economic data is near-instantaneous today, allowing the central bank to be proactive for current conditions. In the 1930s and 40s, for instance, the Federal Reserve had a famously disjointed and delayed response to the bank crises of the Great Depression.
DEEP ROOTS. STUBBORN GROWTH. OREGON-BASED.
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Drew Millegan (left) & Quinn Millegan (right) in front of the Charging Bull in New York City.
About the Managers: Brothers Drew Millegan and Quinn Millegan manage the Woodworth Contrarian Stock & Bond Fund, a hedge fund based in McMinnville, Oregon. They grew up in the finance world, and specialize in contrarian investment strategies in the US Public and Private markets.
Something missing from your portfolio may be a diversification into the Woodworth Contrarian Fund for accredited investors. Now is a great time to diversify your portfolio with an investment into a multi-award-winning fund. An exposure to a value-based contrarian strategy is a unique opportunity for your long term capital that you’re seeking aggressive returns for. With eight years of the Woodworth Fund under management, the Millegan Brothers are trained stock-pickers and experienced venture capital investors with a proven track record. Give us a call today to discuss a liquid investment with independent administration and independently audited monthly statements and a personal relationship.
