Taiwan Semiconductor Mfg. Co. Ltd. (TSM): Are Hedge Funds Right About This Stock?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM).

Is Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) a healthy stock for your portfolio? Hedge funds were in an optimistic mood. The number of long hedge fund positions inched up by 4 lately. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) was in 58 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 63. Our calculations also showed that TSM isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 54 hedge funds in our database with TSM positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Driehaus of Driehaus Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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 daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s check out the new hedge fund action surrounding Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM).

Hedge fund activity in Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)

Heading into the third quarter of 2020, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from one quarter earlier. By comparison, 42 hedge funds held shares or bullish call options in TSM a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Ken Fisher’s Fisher Asset Management has the most valuable position in Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), worth close to $1.6747 billion, accounting for 1.6% of its total 13F portfolio. The second largest stake is held by Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $616.4 million position; 1.1% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism comprise Cliff Asness’s AQR Capital Management, Noam Gottesman’s GLG Partners and Richard Driehaus’s Driehaus Capital. In terms of the portfolio weights assigned to each position Keywise Capital Management allocated the biggest weight to Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), around 9.42% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, setting aside 5.81 percent of its 13F equity portfolio to TSM.

As one would reasonably expect, some big names were leading the bulls’ herd. Hillhouse Capital Management, managed by Lei Zhang, established the biggest position in Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM). Hillhouse Capital Management had $62.5 million invested in the company at the end of the quarter. Daniel Sundheim’s D1 Capital Partners also made a $35.5 million investment in the stock during the quarter. The other funds with brand new TSM positions are Chen Tianqiao’s Shanda Asset Management, Israel Englander’s Millennium Management, and Andrew Sandler’s Sandler Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) but similarly valued. These stocks are JPMorgan Chase & Co. (NYSE:JPM), UnitedHealth Group Inc. (NYSE:UNH), The Home Depot, Inc. (NYSE:HD), Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA), Verizon Communications Inc. (NYSE:VZ), and AT&T Inc. (NYSE:T). All of these stocks’ market caps match TSM’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 85.6 hedge funds with bullish positions and the average amount invested in these stocks was $5481 million. That figure was $5210 million in TSM’s case. JPMorgan Chase & Co. (NYSE:JPM) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TSM is 37.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. A small number of hedge funds were also right about betting on TSM as the stock returned 53.5% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.

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