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Why Taiwan Semiconductor (TSM) Stock is a Compelling Investment Case

Alex Smith
·3 min read

Bonsai Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 63.3% for the quarter (net of fees), outperforming their benchmark, the S&P 500 Index which returned 8.9% in the same quarter. You should check out Bonsai Partners' top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Bonsai Partners highlighted a few stocks and Taiwan Semiconductor Mfg Co Ltd (NYSE:TSM) is one of them. Taiwan Semiconductor Mfg Co Ltd (NYSE:TSM) is a semiconductor contract manufacturing and design company. Year-to-date, Taiwan Semiconductor Mfg Co Ltd (NYSE:TSM) stock gained 52% and on October 23rd it had a closing price of $88.31. Here is what Bonsai Partners said:

"Taiwan Semiconductor is the world’s largest outsourced foundry of logic semiconductor chips.

Taiwan Semiconductor’s shares appreciated approximately 43% during the quarter.

Last we discussed the Taiwan Semiconductor saga, the company was caught in the crossfire of the U.S.- China geopolitical firefight.

If that wasn’t enough to consider, this quarter presented another important development for the business. Today, there are three large manufacturers of cutting-edge logic semiconductor chips: TSMC, Samsung, and Intel. Four if you include SMIC.

Depending on who you asked, it was either Intel or TSMC who had an advantage due to its business model. Some believed Intel’s vertical integration provided an advantage, while others suggested TSMC's singular focus offered an edge.

This debate finally came to a head this quarter as Intel indicated they again stumbled while transitioning to the next process node. This signaled to the market that TSMC has unquestioned process leadership and a multi-year lead. If that wasn’t enough, Intel announced that they too will outsource part of their manufacturing to TSMC.

TSMC has been enjoying a year of strong growth and this development made the narrative even more compelling to investors. I wish I owned more."

In Q2 2020, the number of bullish hedge fund positions on Taiwan Semiconductor Mfg Co Ltd (NYSE:TSM) stock increased by about 7% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Taiwan Semiconductor's growth potential. Our calculations showed that Taiwan Semiconductor Mfg Co Ltd (NYSE:TSM) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.