This is Part 1 of a two-part stock report on AEM Holdings. Click this link to read Part 2.

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What is Value Investing? - by Aaron Pek — Image credit to citatis.com

Value investing - according to conventional finance - is usually described as a dogmatic adherence to buying stocks at low valuation multiples (e.g. P/E, P/B, etc.). The idea is to replicate Benjamin Graham’s success of buying stocks at below or cheap relative to their Net Asset Values - with the objective of spotting mispricings in advance of others and selling when share prices return to fair value.

What most people new to Value Investing tend to miss is the principle behind Graham’s approach - in contrast to the shape it took in the form of buying low-multiple stocks. This is encapsulated in Graham’s famous quote as shown below:

Benjamin Graham quote: An investment operation is one which, upon thorough analysis, promises...

You’ll notice there are two components to this quote. According to Graham, an investment operation has two characteristics: 1) promises safety of principal, and 2) an adequate return. The general idea is to simulate the risk:reward exposure of a bond - where one prioritizes the safety of their capital over maximizing returns. But of course, any incremental risk taken also has to be justified by incremental return - i.e. an adequate return.

You’ll notice this is very different from the entrepreurial association with equity investments - where the investment objective tends to be about maximizing returns, with risk management simply being an afterthought. According to Graham, this does not fulfill the definition of an “investment operation” - where one of the defining characteristics is being able to escape unscathed with your original principal investment should things turn sour.

Quite coincidentally, this principle is also the cornerstone behind another two value investing legends’ investment strategies - George Soros and Warren Buffett’s:

George Soros quote: It's not whether you're right or wrong that's important, but...

Warren Buffett quote: Rule No.1: Never lose money. Rule No.2: Never forget rule...

What both Soros’ and Buffett’ quotes are emphasizing above is that you don’t have to be right about your investment thesis - as long as you don’t lose money even when you’re wrong. Of course, in the best of worlds, you’d be correct on every single one of your stock picks. But given the wildly volatile tantrums thrown by Mother Nature, this doesn’t appear to be a realistic prospect. Hence, the next best thing is to aim to be satisfied regardless of the outcome - and only participate in circumstances which provide that opportunity. This is where sitting still and doing nothing comes in.

Circling back to Graham, we can see how his definition of an investment also aligns with this objective - i.e. promising safety of principal and an adequate return. The principle behind Graham’s value investing strategy was not to dogmatically acquire stocks at cheap multiples - it was to ensure the ability to escape unscathed even if the tables turn against you, by virtue of him buying Net Assets far below the their working capital carrying values. In this way, even if he made a mistake, he could at least still dispose of his shares at around his purchase price.

As most of us know by now, Buffett put a spin on this investment principle of “not having to be right on your investment thesis” by adapting Graham’s value investing approach towards buying the proverbial “wonderful companies”. By buying wonderful companies at a fair price, Buffett’s stocks benefitted from the moats that Graham’s low-quality stock picks typically didn’t - which made life easier for Buffett in a number of different ways. However, he did not stray from Graham’s original principle of not having to be correct about your stock picks in a volatile world - he simply built on top of it and enhanced it, as demonstrated in his following quote:

It's far better to buy a wonderful company at a fair pr... by Warren Buffett - QuoteParrot

To save us all some time, I’m not going to regurgitate all the benefits of buying a wonderful company at a fair price vs buying a fair company at a wonderful price - since I imagine these have been repeated ad nauseam to the point of becoming cliché by now. However, it’s worth noting how Buffett’s quote is still parroting the same first principle of having a sufficient margin of safety between price and value - as encapsulated in another of Graham’s quote below:

Graham's Margin of Safety • Novel Investor

Now, why do I bring all this up? That’s because up until now, most of my stock recommendations have been of the latter variety - i.e. fair companies at wonderful prices. This is not to detract from the magnificent skill of their operators - indeed I have waxed lyrical over the superb management teams who oversee the businesses of my favorite stock picks on recurring occasions. However, it has also coincidentally been the case that most of these businesses do not occupy sectors with the best moats (e.g. Airlines, O&G, Consumer, etc) - given how their share prices fell to attractive prices precisely because they were commoditized businesses operating in an economic downturn (e.g. global lockdowns).

However, for the first time on this blog, I have an attractive idea of the former variety - i.e. a wonderful company at a fair price. Trust me, you’re going to love this one.

If you’d like to learn more about the Value Investing principles that guide the ASEAN stock recommendations on this blog, feel free to click the links below:

Value Investing Substack

What is Value Investing?

Everyone is familiar with the term “value investing” by now. Coined by the ‘Sage of Investing’ Benjamin Graham and popularized by the ‘Oracle of Omaha’ Warren Buffett, value investing has come to be adopted by a legion of investing devout around the world - with 2019’s Berkshire Hathaway AGM being attended by 40,000 attendees. Fun fact: that’s roughly the average attendance of a Taylor Swift concert…

2 years ago · 4 likes · 1 comment · Aaron Pek

Value Investing Substack

Why Value (factor) Investing > Growth (factor) Investing

If heightened uncertainty in the short-term means that it is practically impossible to determine the future trajectory of share prices, then the answer is simple - only invest in stocks where all possible future outcomes are favorable! For the purpose of visualization, this nearly 7,000-word article is divided into 6 chapters…

7 months ago · 3 likes · 2 comments · Aaron Pek

AEM Holdings (SGX:AWX) Links:

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AEM Holdings - Supplying the Lockheed Martin of Tomorrow

As the title implies, AEM Holdings is a key supplier to Intel today. When I started researching AEM Holdings about 2 weeks ago, its share price was hovering between SGD 4.10 - 4.20; however since then, it has climbed by almost +10%. There were 3 broad reasons for this:

Intel CEO Pat Gelsinger recently testified before the US Senate in support of a $52 billion subsidy plan for the semiconductor sector;
He had previously likened semiconductors to the oil reserves of the next generation in a CNBC news interview;
NVIDIA’s CEO Jensen Huang mentioned yesterday that he was open to considering using Intel as a foundry.

AEM Holdings’ share price has climbed nearly +10% over the past two weeks

You may be wondering what I meant by the title of this report - i.e. “Supplying the Lockheed Martin of Tomorrow”. The idea for this title harkens back to the concept of the military industrial complex - which can be described in simple terms as “the relationship between the government, the military, and the businesses that make things for the military”. Basically, it describes the commercial “flywheel” between these three parties - a relationship which is best encapsulated as the sophisticated version of “you scratch my back, I’ll scratch yours”. Now picture all three of them sitting in a circle and commencing mutual back-scratching.

It should come as no surprise then that this relationship has been incredibly profitable for the defence companies participating in this military industrial complex; with two companies in particular serving as the poster children for this unholy alliance - Lockheed Martin and Raytheon. I think the following chart speaks for itself:

Lockheed Martin shares have climbed by 12% CAGR since its 1995 IPO

The reason behind Lockheed Martin’s meteoric share price performance is apparent - it benefitted from the phenomenon of the military industrial complex, simply by virtue of its outsized significance to the USA’s national strategic interest. In its role as the global police force, the US military is unrivalled in its size and reach - with national defense spending outpacing its next closest competitor by 300%. And given the geopolitical importance of global power projection to maintain the USA’s military hegemony, obviously Lockheed Martin’s shareholders have been generously rewarded as well.

However, in the coming decades, there is a new game of geopolitical power projection in town. Unless you’ve been living under a rock at the bottom of the Mariana Trench, you should have heard about the US-China rivalry for global top dog status by now. And while there are many spheres of influence that both sides aim to wield an advantage over the other, for the purposes of this stock recommendation we are only going to focus on one - Semiconductors.

In the video above, the guests being interviewed (who are experts in the Semiconductor sector) describe the industry as a “geopolitical chess piece” in the coming global conflict between the USA and China for strategic superiority. I won’t go into the weeds in the interest of time (you really should watch it anyway, it’s incredibly insightful), but allow me to dramatically oversimplify the highlights this one-hour long interview for you:

There are only 3 semiconductor foundries capable of manufacturing leading-edge chips (e.g. <5nm) in the entire world today - i.e. TSMC, Samsung and Intel.
The barriers to entry to penetrate this industry are nigh unscalable - due to: 1) the insurmountable upfront CAPEX requirements involved, 2) the unimaginable technical complexity of the sector, and 3) its highly commoditized nature. Hence, the 3 existing players are unlikely to see credible competition for awhile - keep in mind that they’re still accelerating towards higher transistor densities at warp speed, not standing still.
Given how the pandemic has accelerated the global adoption of the digital economy by a decade (e.g. where grandmas now know how to use Zoom on iPads to attend church), the global demand for leading-edge semiconductors has since skyrocketed to a practically unserviceable TAM. There are currently only 3 companies with foundries capable of supplying the entire global demand for leading-edge semiconductors.
With AI, Autonomous driving, IoT, Web3, Blockchain, Smart Cloud, Data Centers, VR/AR and incalculably more internet technologies about to reach industry maturity at the same time, Software has indeed Eaten the World. And the Software layer of the Internet relies on the existence of a robust Hardware layer - i.e. leading-edge semiconductors - to usher in the next Gilded Age 2.0.
Given how the next chapter of global GDP growth hinges on leading-edge semiconductors, having no access to them presents a severe impediment to secular economic growth for any economy. Coincidentally, all 3 of the aforementioned companies are aligned with the West - TSMC in Taiwan, Samsung in South Korea, and Intel in USA.
This means that all three of the above semiconductor companies have now become the strategic equivalent of Lockheed Martin to all Western governments - since the West will likely weaponize their semiconductor foundries for national strategic purposes by keeping the leading-edge chips they produce out of the hands of China in the upcoming global conflict. Hence the description, “geopolitical chess piece” - and why Intel represents the Lockheed Martin of Tomorrow.

The entire Macro backdrop for the semiconductor sector is impressive in both its scale and scope, and I highly recommend giving the above interview a listen to familiarize yourself with the sector’s contribution to the wider geopolitical context. However, if you think that the wider macro situation as described above is complicated - start worrying, because the semiconductor industry itself is even more so.

The reason why I decided to break out this stock report for AEM Holdings (AEM) into two parts is because in order to appreciate the investment case for AEM, we actually need to study two companies - Intel and AEM. The basic thesis here is that if Intel does well, AEM will follow in its footsteps by virtue of being an Intel proxy. Hence, this report is best consumed by dividing it into two parts - Part 1 where we try and peer into Intel’s crystal ball; and Part 2 where we actually do a deep-dive into AEM itself.

In this AEM Part 1 report, I’m largely going to be explaining why Intel is the Lockheed Martin of Tomorrow - and consequently why AEM as a core supplier to Intel (i.e. Intel proxy) can benefit from the rising tide that lifts all boats. Part of the reason why this report is so long is because without understanding the wider Intel story, it’s difficult to see how AEM is a wonderful business. Hence, I’ll need to first need to tell you the Intel story - and then the AEM story will automatically fall into place once you understand its business in Part 2. Strap in - you’re in for a treat.

*Or get a 30-day trial for FREE to read the rest of this 9,000-word report by clicking this button!*

Semiconductor Industry Primer

In order to understand the massive moat surrounding Intel’s business, we first have to understand the different stages of the supply chain which Intel occupies within the global semiconductor sector. This section will help you get up to speed with each of the 5 stages involved in manufacturing a leading-edge semiconductor chip.

Value Investing Substack

✨ AEM Holdings - Supplying the Lockheed…

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