- Berkshire Hathaway's latest 13F filing shows Warren Buffett bought Taiwan Semiconductor in the third quarter.
- Taiwan Semiconductor's shares are trading near their 5-year P/E low.
- Technical analysis suggests investors take a patient approach.
The Oracle of Omaha may not be on your speed dial, but you can still follow in Warren Buffett’s footsteps. The billionaire is required to file a 13F report detailing Berkshire Hathaway’s latest buys and sells every quarter.
Berkshire Hathaway released its third-quarter filing after the bell on Monday. Warren Buffett and his co-managers, Todd Combs and Ted Weschler, weren’t very busy last quarter, but they did pick up shares in semiconductor manufacturing giant Taiwan Semiconductor (TSM) .
Buffett hasn’t explained why Berkshire Hathaway bought Taiwan Semiconductor yet, but its shares are trading near their five-year P/E lows. The company is an industry Goliath that could benefit from billions of dollars in government spending, so let’s see if the charts suggest investors should be buying, too.
Is Taiwan Semiconductor stock cheap?
Berkshire Hathaway’s 13F doesn’t disclose exactly when Warren Buffett bought Taiwan Semiconductor stock, but it does reveal it finished the third quarter owning 60.1 million shares in the company worth $4.1 billion.
Berkshire Hathaway manages $296 billion, so Taiwan Semiconductor constitutes just 1.4% of its portfolio. Apple Inc (AAPL) represents nearly 42% of its portfolio, so this position may sound small. Nevertheless, it’s still large enough for Taiwan Semiconductor to rank as Berkshire’s 10th largest holding exiting September.
Taiwan Semiconductor is an excellent proxy for the semiconductor industry because it’s the world's largest manufacturer of semiconductor chips, with a market share north of 53%.
Last year, it benefited from supply constraints supporting pricing and a strong economy bolstering chip demand. This year, pricing has moderated, and shares have suffered because China’s COVID lockdown policy has limited original equipment manufacturers' production levels. Saber-rattling between China and the U.S. over Taiwan’s sovereignty hasn’t helped, either.
As a result, Taiwan Semiconductor’s shares retreated below $60 in October from $145 in January, a 58% decline. That was worse than the performance of the SPDR® S&P® Semiconductor ETF (XSD) , which fell 46% from its peak in December to October’s low.
Yet Taiwan Semiconductor has still delivered robust growth this year. For example, revenue grew 36% year-over-year to $19.3 billion in the third quarter, and earnings per ADR unit increased 66% to $1.79. As a result, analysts expect earnings per ADR unit of $6.52 this year and $5.93 next year. If we use yesterday’s closing price before Berkshire Hathaway’s disclosure, Taiwan Semiconductor’s current year and forward price-to-earnings ratios are 11.2 and 12.3, respectively, close to the low end of its 5-year P/E range of 10 to 39.
Do Taiwan Semiconductors charts confirm it's a buy?
In “Warren Buffett Uses Stealth to Take a Big Stake in Taiwan Semiconductor,” Real Money technical expert Bruce Kamich digs into the charts to determine if Taiwan Semiconductor’s stock is a buy.
Using a daily price chart as his guide, Kamich writes, “The daily On-Balance-Volume (OBV) has been weak into early November and only managed a minor upturn. This is the sign of a really good trading desk -- they were able to buy a huge position on weakness and not push up the price and attract unwanted attention. The Moving Average Convergence Divergence (MACD) oscillator has improved in recent weeks and is close to crossing above the zero line for an outright buy signal.”
On-balance volume is essentially a running total of up minus down-day volume. MACD is a momentum indicator that subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero.
Looking at the weekly chart, Kamich says, “In this weekly Japanese candlestick chart of TSM, below, we can see a bottom reversal pattern in October. The large white (bullish) real body in early November is the belated signal of aggressive buying after a spinning top and a doji…The weekly OBV line shows a two-year decline, so this purchase by Buffett could well be early in a potential reversal. The MACD oscillator is poised for a cover shorts buy signal.”
Kamich also considers the daily point-and-figure charts to gauge potential price targets, determining that each suggests a price of $103 and $102, respectively.
Despite those targets representing a nice return from where Taiwan Semiconductor is currently, the lackluster on-balance volume and yet-to-signal MACD may raise concern, particularly given shares are skyrocketing higher today, creating a gap that may eventually be filled.
Kamich concludes, “TSM has made a low, but a bottom pattern is yet to come. V bottoms are real, but I like to see other patterns. The Buffett news is going to attract a lot of attention and followers. TSM is likely to gap higher, but a pullback or correction is going to unfold at some point in time. This pullback is when I want to consider being a buyer. Meanwhile, I will pass the chips.”
The Smart Play
Recently, co-portfolio manager Todd Combs said that when he talks stocks with Warren Buffett, they consider how many S&P 500 stocks will trade below 15x earnings next year, earn more in five years, and compound at 7% growth or better? Combs says that exercise, which identified Apple, is valuable because it addresses cyclicality, compounding, and initial price.
Taiwan Semiconductor is cheap enough to clear the first hurdle. It’s also possible it can deliver on Buffett’s 5-year earnings growth target.
An increasingly connected world means that even everyday goods are incorporating semiconductors.
Moreover, Europe and the U.S. are about to ramp up subsidies and tax credits to help foundries create manufacturing redundancy for the first time in decades. Europe is spending $48 billion to encourage semiconductor production, and the U.S. has earmarked $53 billion for profit-friendly subsidies and tax credits. Taiwan Semiconductor has already announced plans to build a new $5 billion plant in Texas. It also plans to spend up to tens of billions of dollars building plants in Arizona.
Nevertheless, some caution is warranted. A global recession could mean Taiwan Semiconductor’s revenue and profit fall more than expected in 2023. It also wouldn’t be shocking if shares take a breather after making such a big move, as Kamich suggests.
Therefore, consider a patient approach if you want to buy Taiwan Semiconductor shares. For example, you could take a starter position in the stock if the MACDs officially flash a ‘cover shorts’ signal and the on-balance volume improves. Then, you can buy more if it retreats to fill its gap or builds a better base.