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Were Hedge Funds Right About Taiwan Semiconductor Mfg. Co. Ltd. (TSM)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) and determine whether the smart money was really smart about this stock.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) was in 54 hedge funds’ portfolios at the end of March. TSM investors should be aware of a decrease in support from the world’s most elite money managers in recent months. There were 63 hedge funds in our database with TSM holdings at the end of the previous quarter. Our calculations also showed that TSM isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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 58 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the fresh hedge fund action encompassing Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM).

How are hedge funds trading Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)?

At the end of the first quarter, a total of 54 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the fourth quarter of 2019. By comparison, 39 hedge funds held shares or bullish call options in TSM a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TSM A Good Stock To Buy?

The largest stake in Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) was held by Fisher Asset Management, which reported holding $1418.1 million worth of stock at the end of September. It was followed by AQR Capital Management with a $540.4 million position. Other investors bullish on the company included Arrowstreet Capital, Renaissance Technologies, and GLG Partners. In terms of the portfolio weights assigned to each position Driehaus Capital allocated the biggest weight to Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), around 6.41% of its 13F portfolio. Tairen Capital is also relatively very bullish on the stock, setting aside 6 percent of its 13F equity portfolio to TSM.

Because Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) has experienced bearish sentiment from the smart money, we can see that there exists a select few funds who sold off their entire stakes heading into Q4. It’s worth mentioning that Josh Resnick’s Jericho Capital Asset Management dumped the largest investment of the “upper crust” of funds tracked by Insider Monkey, totaling about $94 million in stock, and Michael Rockefeller and KarláKroeker’s Woodline Partners was right behind this move, as the fund cut about $43.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 9 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM). We will take a look at Mastercard Incorporated (NYSE:MA), UnitedHealth Group Inc. (NYSE:UNH), Intel Corporation (NASDAQ:INTC), and Verizon Communications Inc. (NYSE:VZ). This group of stocks’ market caps are closest to TSM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MA 139 11896575 14
UNH 104 6665163 13
INTC 73 5958759 15
VZ 68 2673270 3
Average 96 6798442 11.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 96 hedge funds with bullish positions and the average amount invested in these stocks was $6798 million. That figure was $4299 million in TSM’s case. Mastercard Incorporated (NYSE:MA) is the most popular stock in this table. On the other hand Verizon Communications Inc. (NYSE:VZ) is the least popular one with only 68 bullish hedge fund positions. Compared to these stocks Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is even less popular than VZ. Hedge funds dodged a bullet by taking a bearish stance towards TSM. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately TSM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); TSM investors were disappointed as the stock returned 19.7% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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