We recently compiled a list of the 10 Most Owned Stocks by Hedge Funds Right Now. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other stocks owned by hedge funds.

Wall Street stocks surged this month after the Federal Reserve released minutes of its September meeting, which resulted in the first interest rate cuts in over four years. The details disclosed a ‘substantial majority’ of central bankers backing the 0.5 percentage-point cut, raising optimism among investors for further cuts ahead.

The broader market hit record highs on October 11, driven by several financial stocks reporting stronger-than-expected results during the recently concluded quarter. Another factor encouraging investors has been the downturn in US inflation, which fell to 2.4% in September and is inching toward the Federal Reserve’s goal of a two percent annual rate. This has raised hopes of a quarter-point cut in the central bank’s next meeting in November.

However, some analysts warn against diving into stocks after interest rate cuts, citing uncertainty around the upcoming presidential elections. Liz Young Thomas, the head of investment strategy at SoFi, while talking to Business Insider in early September discussed historic patterns in US markets towards the end of the third quarter and the beginning of the fourth.

She noted how the market performs well between June and August due to thinner volumes when traders are on vacation, while volatility picks up with an uptick in activity after they return to their desks in September. However, during the election year, this volatility peaks around mid-October, instead of September, according to Young Thomas.

Fundstrat Global Advisors’ co-founder, Tom Lee, has also cautioned investors against election-related uncertainty. Here is what he stated in an interview with CNBC late last month:

This Fed cut cycle I think is setting the stage for markets to be really strong over the next one month or next three months. But, what the stocks do between now and let’s say election day, I think is still a lot of uncertainty. And that’s the reason why I’m a little hesitant for investors to dive in.

Earlier that month in the weeks leading to the interest rate cuts, Lee, who is generally bullish on the stock market, forecasted a 7-10% dip between September and October amid nervousness around the presidential elections. However, Lee urged investors to ‘buy the dip’, indicating that he sees the likely fall as an opportunity to buy stocks while they trade for a lower value.

Adam Turnquist from LPL Financial also anticipates seasonal volatility in the weeks ahead but reiterated what Lee did, that the dip presents an opportunity to buy when the share is trading low and earn high returns when the market stabilizes. Turnquist advises investors not to readjust their existing portfolios because seasonal volatility has short-term effects and is difficult to forecast.

With that said, let’s now shift focus to hedge fund sentiment on the stock market and discuss some of the most widely held stocks by hedge funds.

Methodology

We scanned Insider Monkey’s database of 912 hedge funds for the second quarter of 2024 and picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)

Number of Hedge Fund Holders: 156

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is a semiconductor design and manufacturing foundry based at the Hsin-Chu Science Park in Taiwan. According to a report on CNN, the company produces around 90% of the world’s super-advanced semiconductor chips used to power electronic devices such as smartphones, servers, and laptops. These chips are also used to run most artificial intelligence applications.

The company reported robust results during the second quarter of 2024, with a sequential revenue increase of 10.3% in U.S. dollars to reach $20.82 billion. This was also 32.8% higher year-over-year. Operating margin for the quarter was recorded at 42.5%. The net profit margin stood at 36.8%, helping the company log an EPS of $1.48 which beat analysts’ expectations of $1.37 per share. TSMC attributed the solid performance in Q2 to strong demand for its 3-nanometer and 5-nanometer technologies.

TSMC ended the quarter with $63 billion in cash and marketable securities, after generating over $11.5 billion in cash from operations. The company also reduced its accounts receivable turnover from 31 days to 28 days, reflecting its sound financial position. For Q3, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) forecasts revenue to be in the range of $22.4 billion and $23.2 billion, which will represent a 32% year-over-year and 9.5% sequential increase. Operating margin is expected between 42.5% and 44.5%.

These impressive results, coupled with announcements from various large companies to expand their investments in artificial intelligence have led to a bullish sentiment around the stock. Parnassus Growth Equity Fund stated the following regarding TSMC in its Q2 2024 investor letter:

Taiwan Semiconductor Manufacturing Company Limited’s (NYSE:TSM) leading position in AI chip production continued to boost investor sentiment on the stock. During the quarter, announcements by several large technology companies to expand their AI investments signaled insatiable demand for TSMC’s chips and contributed to the stock’s rise.

Looking ahead, the chip giant expects 2024 to be a year of high growth for the company. During the earnings call, Chairman and CEO, Dr. C.C. Wei said that the teams were working hard to enhance capacity to support customers. He also did not rule out the possibility of converting N5 technology to N3 to meet strong demand. Wei also added that the development of 2-nanometer technology was on track to enter full-volume production in 2025.

Considering these factors, most Wall Street analysts have maintained TSMC’s Strong Buy rating and expect a share price appreciation of around 8%. TSM is also one of the most owned stocks by hedge funds right now. According to Insider Monkey, 156 hedge funds had investments in the company, as of Q2 2024. This was up from 135 at the end of Q1, reflecting positive hedge fund sentiment.

Overall TSM ranks 8th on our list of the most owned stocks by hedge funds right now. While we acknowledge the potential of TSM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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