One of the great maxims of traders and Wall Street pros is to follow the "smart money."
I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.
Next up: Taiwan Semiconductor Manufacturing (NYSE: TSM ) . Are institutions bullish or bearish when it comes to this third-party manufacturer of chips for electronic devices?
|CAPS stars (out of 5)||*****|
|Bullish pitches||181 out of 186|
|Highest-rated peers||Sigma Designs, TriQuint Semiconductor, Trident Microsystems|
Data current as of June 13.
First, allow me to admit a bias. I've owned shares of Taiwan Semiconductor for four years now and my real-money position is up more than 77% in that time, fueled in part by a dividend that's yielded between 2% and 4% historically. Reinvesting has served me well, as it has for so many other Fools.
But what makes Taiwan Semi interesting to me is its market position and valuation. In many ways, TSMC is the Intel (Nasdaq: INTC ) of its industry; the world's largest operator of semiconductor manufacturing facilities whose revenue -- $15 billion over the trailing 12 months -- is more than twice that of its Asian peers, China's Semiconductor Manufacturing International (NYSE: SMI ) and Taiwan's United Microelectronics (NYSE: UMC ) . Neither company can match Taiwan Semi's 2.9% yield.
There's also a valuation gap. TSMC entered the day trading for less than 12 times next year's consensus earnings estimate of $1.12 a share. Wall Street expects profits to improve 13% over the same period. Premium pricing this isn't. By contrast, SMI and UMC entered the day each trading for at least 50 times next year's earnings estimate.
UMC, in particular, is falling behind TSMC in the race to fill device makers' chip orders. The company reported a 6.8% revenue decline just as Taiwan Semi was enjoying 6.3% top-line growth last month. TSMC's advanced capabilities in small-scale chip manufacturing seem to be keeping customers from trying rivals' cheaper services, Reuters reports.
Institutional ownership history
|Government Of Taiwan||1,733,555,798||1,742,323,883||1,726,974,007||1,726,974,007|
|Dev. Fund, Executive Yuan||1,653,710,275||3,307,420,551||1,653,709,980||1,653,709,980|
|Capital Research and Management||1,823,792,064||1,050,436,887||766,352,746||776,692,086|
|Saudi Arabian Monetary Agency||-||-||763,124,250||763,124,250|
|The Vanguard Group||251,679,165||375,600,575||573,871,791||581,380,830|
|TOP 25 TOTAL||8,957,945,038||11,803,297,539||11,820,566,351||11,569,475,051|
Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.
Big Money investors like to bet on a winner, and as a group, they've liked Taiwan Semi since 2009. Only recently have some institutions taken money off the table -- notably, JPMorgan Chase's (NYSE: JPM ) wealth management group and Aberdeen Asset Management of the United Kingdom.
Among mutual fund managers, the $162 billion American Funds Growth Fund of America (AGTHX) and the highly rated Drefyus International Stock (DISAX) both opened new positions this spring, while the legendary Vanguard Wellington (VWELX) fund had boosted its stake in Taiwan Semi by more than 15% at the close of the March reporting period.
And yet, while some high-rated managers were buying, others were selling. Will Danoff of Fidelity Contrafund (FCNTX) sold off more than 30% of his fund's stake in TSMC during the March reporting period. David Decker's Janus Contrarian (JACNX) sold off more than 21% of its Taiwan Semi holdings around the same time. There's no clear consensus among the Big Money crowd as to whether now is the right time to buy. I think it is.
Competitor and peer checkup
|Advanced Micro Devices (NYSE: AMD )||58.84%||3.99%|
|Semiconductor Manufacturing Int'l||16.04%||Not specified|
|Taiwan Semiconductor Manufacturing||46.72%||1.13%|
|United Microelectronics||27.30%||Not specified|
Source: Capital IQ. Data current as of June 13. AMD spun off its manufacturing arm but still maintains an equity interest in the new entity: GlobalFoundries.
Not only is Taiwan Semiconductor the strongest competitor in this group -- one of only two with more cash than debt -- but it also has an excellent ownership profile.
Institutions own less than 50% of the shares outstanding, leaving plenty of room for Big Money investors to bid up the stock price. At the same time, Chairman and CEO Morris Chang still owns roughly one-half of 1% of the company he helped found 24 years ago. Between Chang and the government of Taiwan's 6.7% stake, there's plenty of homegrown incentive for TSMC to keep executing as it has.
Now it's your turn to weigh in. Let me know how you would rate Taiwan Semiconductor using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.
Or, if you're on the hunt for more semiconductor stock ideas, I recommend this Motley Fool special report. In it, you'll get details on a TSMC customer that is, according to my Foolish colleague Eric Bleeker, on track to deliver market-crushing returns to investors. Click here to get a copy of the report -- it's 100% free.