Taiwan Semiconductor comes with risks, this investor says

Chip-maker Taiwan Semiconductor (Taiwan Semiconductor Manufacturing Stock Quote, Charts, News, Analysts, Financials NYSE:TSM) has had a nice rally over the month of November, in part from getting the nod from Warren Buffett and Berkshire Hathaway, but investors thinking of buying the stock need to understand the risks, especially concerning the relationship between Taiwan and China. So says portfolio manager James Telfser, whose firm sold TSM earlier this year.

The world’s largest dedicated foundry for integrated circuits, Taiwan Semi saw its share price climb higher this month, clawing back some of the dramatic losses the stock has suffered this year. The $425 billion market capitalization company had its share price cut in half before rallying to its current level at a negative return of about 33 per cent.

News arrived mid-month with Berkshire Hathaway’s disclosure of its portfolio holdings, which showed the company making a purchase last quarter of 60 million shares in TSMC, perhaps a surprise move to some, as CEO Buffett has been reluctant to buy tech companies (Buffett says Apple, Berkshire’s largest holding, is a consumer products company). Now, along with game developer Activision Blizzard, Berkshire has a $4 billion stake in Taiwan Semi, representing Berkshire’s tenth-largest holding.

But for Telfser, the threat of China some day taking over Taiwan is a real impediment to owning TSM, with the fuss made earlier this year over a US Congressional delegation’s visit to Taiwan providing a clear example of how hot-button the issue can be.

“We still think there are massive trends in this business and Taiwan Semi has the best tech and the best innovation in this space,” said Telfser, speaking on BNN Bloomberg on Tuesday. 

“Of course, the geopolitical risk was a big part of what drove this stock lower and we saw that as being a big risk as well, and so we exited the stock along the way. We just thought if we want to be in the semiconductor space and benefit from that, there are other opportunities without that big overhang,” he said.

On the Berkshire Hathaway investment Telfser said it shows the strength of the moat around TSM.

“We think they’ll do just fine. Again, it’s about time horizons and being patient and this is one you’ll have to be patient with, but it is a great business and it’s trading at a ten-year low valuation relative to where it’s been,” he said.

“If you can stomach that volatility and the geopolitical risk, it’s worth a punt,” he said.