6 minBusiness
Government stock stakes face new risks from elections and lawsuits
Market strategists see rising risks for US government equity positions in companies like Intel, MP Materials, and Trilogy Metals as midterm elections approach and a shareholder lawsuit challenges the legality of the investments.
The US government's unprecedented strategy of taking ownership stakes in publicly traded companies has delivered big gains for investors who followed the administration's moves. But with polarized midterm elections approaching and polls suggesting Democrats could win control of at least one chamber of Congress, market strategists warn that these equity positions now face rising scrutiny in Washington and the courts, a shift that could reverse much of the momentum driving the stocks.
“There is a sort of interventionist approach that is not fully litigated and mediated in the American system yet,” said Matt Gertken, who leads geopolitical and US political analysis for BCA Research. “So there's going to be ups and downs in that process.”
The government's involvement has clearly lifted stock prices. Intel Corp. shares have soared more than 300% in the year since reports emerged that the administration was in talks to take an ownership stake in the chipmaker. MP Materials Corp. is up 87% since last July, when the Department of Defense made a $400 million equity investment in the rare earth minerals company. Trilogy Metals Inc. has gained 73% since October, when the US government agreed to take a 10% stake in the Canadian minerals exploration firm in a deal that included approval for an Alaska road project essential to accessing its mining claims.
Those gains have come in bursts, however. Trilogy Metals' US shares jumped from $2.09 to a high of $10.60 within days of the deal announcement, then quickly gave up those gains and now trade for $3.62. MP Materials soared more than 150% within five weeks of the government taking a stake, but it is down nearly 27% in the year since then.
Intel is a slightly different case because it is also caught up in the mania for chip stocks as spending on artificial intelligence creates extreme demand for semiconductors. The stock rose steadily as earnings improved, peaking in June after President Donald Trump said Apple Inc. will work with the company to design and produce semiconductors in the US. But it is down 37% since then, the fifth worst performance in the S&P 500 Index over that stretch.
Part of the skepticism surrounding Intel involves a shareholder lawsuit against the company's board, the US Department of Commerce and Commerce Secretary Howard Lutnick, seeking to unwind the government's ownership position. If successful, investors will have to assess the durability of the administration's entire portfolio.
“It is really the government investment that really turned it around, and it's certainly what I think is a factor in keeping the stock where it is right now,” said Mark Malek, chief investment officer of Siebert Financial, which owns Intel shares. “If you pull that away, the question is then what happens? That is why we haven't increased our investment at all.”
The more conventional concern is the highly partisan environment in Washington. If Democrats gain control of the Senate or House, they can hold hearings and subpoena witnesses. Senator Elizabeth Warren, who is in line to chair the Senate Banking Committee if the party wins the chamber, has already written to Lutnick questioning the Intel investment. Party leaders are also laying groundwork to investigate companies with ties to the administration and the president's family.
Democrats are “going to want to punch at the president as often as possible for as long as possible,” said Henrietta Treyz, co-founder of research firm Veda Partners. She expects Democratic-run committees to summon corporate executives and administration officials to Capitol Hill, creating risks for the companies' brands and share prices. “That's one of the most important takeaways for investors right now,” Treyz said.
The risks from litigation may be even bigger than the elections. The Intel shareholder suit argues that the Chips Act does not give the government authority to demand an equity position as a condition of receiving a grant. It alleges the deal was a breach of the board's fiduciary duties and amounts to an “extortionary” seizure. Lutnick has asked the court to dismiss the case, saying the arrangement was authorized under federal law and is important for the US defense industrial base. Intel Chief Executive Officer Lip-Bu Tan and other board members have also moved to dismiss the case.
“If the courts end up deciding that the Chips Act does not give the Commerce Department authority to do what they did with Intel, that has broad ramifications for a lot of these deals,” said Josh Lipsky, senior director of the Atlantic Council's GeoEconomics Center. Such a decision would call into question other equity investments made under the Chips Act, according to University of Colorado law professor Ann Lipton. The Commerce Department has used funding from the bill to invest in several other companies, including International Business Machines.
Intel, Trilogy Metals and another investment recipient, USA Rare Earth Inc., declined to comment. Trilogy cited the process of closing its deal with the government. The Commerce Department and other companies mentioned did not respond to requests for comment.
