Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) reported today a net income of NT$79.42 billion (about $2.55 billion) and diluted earnings per share of NT$3.06 or $0.50 per ADR unit, both up by 33% compared to last year’s equivalent quarter in New Taiwan dollars, securely beating EPS expectations of $0.44 per share for the second quarter that ended June 30. Revenue stood at NT$205.44 billion (about $6.59 billion), just below the consensus estimate of $6.60 billion. In New Taiwan dollars, the revenue growth was 12.2%.
While gross margin for the quarter declined to 48.5% from 49.8% and operating margin fell to 37.5% from 38.6% in the year-ago quarter, net profit margin rose to 38.7% from 32.6% in the same quarter last year, adding to the boost in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)’s earnings per share. It should be noted, however, that revenue growth slowed in the quarter, as revenue in U.S. dollars increased 16.3% in the second quarter of 2014 compared to the second quarter of 2013, while increasing 9.6% for the just-ended quarter compared to the second quarter of 2014.
Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)’s 20-nanometer process technology, nonexistent in the same quarter last year, and which accounted for 16% of revenues in the first quarter, accounted for 20% of total wafer revenues in the second quarter. Shipments of 28-nanometer process technology, meanwhile, accounted for less of total wafer revenues, at 27% in the second quarter, versus 37% in the second quarter of 2014 and 30% in the first quarter of 2015. The firm said that “advanced technologies”, such as 28-nanometer and 20-nanometer technologies, accounted for 47% of total wafer revenues.
The earnings beat by Taiwan Semiconductor Mfg. Co. Ltd. appears not to have been foreseen by hedge funds. By the end of March, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, one more from one quarter earlier, which may lead one to believe hedge funds were bullish in said period. However, the total value of holdings held by the funds among those we track which were still long on TSM by March 31 declined by 6.46% to $1.78 billion compared to the previous quarter. This bearish sentiment is further boosted by a 4.92% growth in the stock in the first quarter. The smart money was justified, however, as the stock declined by 3.28% in the second quarter, and even dipped this morning following the earnings report, though it has since steadily rebounded to sit ahead by 0.40% for the day.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 139% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 80 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
At Insider Monkey, we also follow company insiders of companies like Taiwan Semiconductor Mfg. Co. Ltd. to see whether these insiders have recently purchased or sold stock in the company. This tells us if company insiders are willing to risk their money on their firm’s stock or whether they are cashing in. However, there were no recorded purchases or sales of shares by insiders of Taiwan Semiconductor Mfg. Co. Ltd. through July 15.
With all of this in mind, we’re going to go over the new hedge fund activity concerning Taiwan Semiconductor Mfg. Co. Ltd.
What does the smart money think about Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)?
Of the funds tracked by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the biggest position in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), owning 24.68 million shares worth about $579.4 million. Next to Fisher Asset Management is Cliff Asness of AQR Capital Management, who owned 14.09 million shares worth about $330.9 million on March 31. Other members of the smart money with similar optimism includes Simon Sadler’s Segantii Capital, Jim Simons’ Renaissance Technologies, and Howard Marks’ Oaktree Capital Management.
PDT Partners, managed by Peter Muller, created the biggest position in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) during the first quarter, buying 1.24 million shares worth $29.1 million. Glenn Russell Dubin’s Highbridge Capital Management also initiated a $3.0 million position during the quarter, buying 126,000 shares. However, Fang Zheng’s Keywise Capital Management dumped 1.88 million shares worth $42.18 million. Bernard Horn’s Polaris Capital Management also dumped 17,239 shares worth about $386,000.
Because of bearish sentiment on Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), we do not recommend going long in this stock at the moment.
Disclosure: None
