High Tech with Low-Risk
Our Peter Lynch Portfolio 29 bought shares and sold two put contracts on what is a new name for us yesterday afternoon.
Taiwan Semiconductor (TSM) opened the world’s first dedicated contract semiconductor foundry in 1987. They remain the global leader in the field with projected 2015 sales of more than $27 billion.
Fabless customers (those without their own manufacturing facilities) accounted for about 85% of last year’s revenue. Integrated device makers booked up the rest of TSM’s capacity in 2014. TSM is a low-risk play on the overall volume of technology wafer production.
Earnings per share grew steadily, from $0.54 in recession ravaged 2009, to $1.68 in 2014. Q1 numbers were up more than 54%, at $0.48 versus $0.31. Full year estimates now center on $1.85, an all-time best.
TSM’s shares paralleled the rising profits, moving from below $7 to as high as $25.77. TSM went Monday ex-dividend on Monday for a payment of about $0.73. That, combined with the Greece-related market sell-off, drove TSM down to under $23 again.
The company is financially strong. As of Mar. 31, 2015, TSM’s long-term debt was under $6.8 billion while corporate cash totaled above $16.5 billion.
Monday's sell-off allowed for a great entry point. The stock’s impressive six-year rise has been outdistanced by the improved fundamentals. TSM closed on Jun. 26, 2015, at $22.38 per share.
Value Line noted that the company’s 10-year median multiple is14x. Its post-recession average was 13.7x. TSM’s current year P/E now sits near 12.1x its 2015 projection and only 11.5x next year’s estimate. Those are among the cheapest valuations for TSM during the past six years. TSM appears to be a classic GARP (Growth At a Reasonable Price) investment.
2015’s almost 73-cent dividend was the highest yet. Note that TSM pays the entire amount, once each year. Payouts are subject to 15% foreign tax withholding. This year’s payment equated to a very nice 3.26% on a pre-tax basis. Non-sheltered accounts can recoup foreign withholding via a tax credit.
Simply returning to a normalized valuiation implies Taiwan Semi could reach at least $27 - $28 over the next 12 to 18 months. That implies upside of around 22% on top on the normal dividend that should be paid around late June in 2016.
Research outfit Standard & Poors confirms that idea. They see $27 as a 12-month goal and call 'fair value' as a bit higher than that.
We bought 134 shares at $22.40, using $3001.60 from our cash reserve fund. Our cash balance is now down to $11,700.47 from an origianl $100,000 stake.
At 12:10 PM on Monday our Peter Lynch Puit writing Portfolio was able to collect $1.90 per share in option premium by selling two contracts of TSM's Jan. 20, 2017, $20 puts.
Break-even on that short sale dropped the ‘if exercised’ price all the way down to $18.10 ($20 strike price - $1.90 put premium). TSM has not changed hands for that low a price since March of 2014.
Maximum profit would be keeping 100% of the $380 premium received. The worst case scenario would be forced purchase of 200 additional TSM shares at very close to the firm's 15-month exact low.
Taiwan Semi is appealing as a relatively low-beta way to play tech. It appears less risky than the better-known semiconductor names it does business with.
Disclosure: Long TSM shares, short TSM Jan. 2017, $20 puts in my personal accounts Continue Reading »