Part 5

Taiwan Semiconductor Manufacturing Company (TSM)

Taiwan Semiconductor is a Taiwanese multinational semiconductor contract manufacturing and design company. It is one of Taiwan’s largest companies, the world’s most valuable semiconductor company, and the world’s largest dedicated independent (pure-play) semiconductor foundry, with its headquarters and main operations located in the Hsinchu Science Park in Hsinchu, Taiwan. Taiwan Semiconductor was established back in 1979 and to this day remains under the direction of its founder and CEO, Arthur Wang. The company has grown from its beginnings as a local manufacturer, to a global enterprise with 1,500 employees.

Recognized for more than 40 years for its core competence in discrete Power Rectifiers, Taiwan Semiconductor has expanded its product portfolio to include Trench Schottkys, MOSFETs, Power Transistors, LED Driver ICs, Analog ICs and ESD Protection Devices, and now provides a complete solution from one source.

The global chip shortage, which has resulted from the elevated levels of demand worldwide is considered to be a major tailwind for the future growth of TSMC.

Taiwan Semiconductor products are used in a vast array of applications in the electronics industry, including automotive, computer, consumer, industrial, telecom and photovoltaic. Through strategic expansion of innovative manufacturing capabilities, and its focus on pioneering efficient semiconductor solutions, Taiwan Semiconductor is committed to being the right choice for a successful and lasting business relationship.

Current position – Financial Performance & Future Growth Prospects

As we have already discussed on few occasion in our previous articles, the COVID-19 pandemic did indeed change the world. From affecting the public health to completely disrupting the global supply chain, COVID-19 showed us how interconnected and correlated the global economy actually is. Many market participants failed to realize the scope of the potential long-term impact that this forced economic shutdown could have. However, the recent shortage of microchips globally has resulted in Only now we are beginning to realize the magnitude of this disruption, especially in the semiconductor industry, as whole sectors in the market are sitting literally frozen at the moment, unable to meet their production goals due to the lack of the microchips out there. The more we move on towards the digital side of things, with 5G, IoT, AI, VR etc. slowly but surely becoming mainstream functions of the modern society, the more important the actual hardware that powers these technologies will become. Essentially, without enough microchips the technology-driven world that we are living in, could literally stop. Throughout the last 12 months, as a result of the pandemic, people have been unable to spend their savings on services, thus they have shifted their spending onto certain goods like cars and electronic devices. When you combine the much higher global demand for these products with the overstocking activities performed by China few months ago, then you get a global semiconductor chip shortage, which could last well into 2022 and beyond.

When we look back in history, we can clearly see that during different historical and economic periods there was a different commodity lying at the heart of that economy at the time. Starting from food related commodities like rice and wheat, sugar and salt, and going all the way to industrial and manufacturing commodities like steel, coal, oil and natural gas. History has taught us that the actual importance of a certain commodity could be so high that it could create large number of geo-political and strategic advantages of certain geographical regions over others. For example, the abundance of Oil made the Middle East one of the richest and most influential regions in the world. What’s interesting is that we believe that something similar is happening right now with the hottest commodity in the world at the moment – microchips. The dominance of the Far East region in the manufacturing of semiconductor systems, chips and microprocessors is quite obvious with countries like China, Taiwan and South Korea leading the race on all fronts. The reason why microchips have become so exceptionally important is because they lie essentially at the foundation of the digital age economy.

To continue with our oil comparison Taiwan Semiconductor Manufacturing’s importance in the chip manufacturing market is comparable to the Saudi Aramco one in the oil market. With a market cap of $550 billion, it is the 11th-largest U.S.-traded company and the third-largest foreign company available on U.S. exchanges (behind Tencent and Alibaba). TSMC is widely recognized as the company with the most sophisticated production capability in the world. Most of the microchips are indeed produced by TSMC.

What makes Taiwan Semi special is that despite of its large size, the company is growing at a relatively high rate. TSMC not only delivered record-high revenue, net income, and spending in 2020, but the company also gave a solid and upbeat guidance for 2021 including $30 billion in 2021 capital expenditures, which just as a reference is nearly double what the company spent last year.

The large portion of this huge CapEx budget will go towards the development of advanced process technologies like 3-, 5-, and 7-nanometer chip, as the company’s main goal is to continue to lead the market ahead of competitors like Intel and Samsung. Something that has really stood out in TSMC last few quarters was the heavy reliance on its smartphone and high-performance computing producst as over 75% of the company’s revenue came from these two categories. This was something that initially worried some analysts as they argued that the company is not well-diversified. However, in its most recent Q1 earnings call TSMC announced that they are seeing rapid growth in industries like Internet of Tings (IoT) and automotive. From a purely valuation perspective, the company has a forward P/E ratio of 28.75, and a PEG ratio of 1.81, which definitely doesn’t make it necessarily a cheap stock. However, with its unique leading position and the promising growth momentum in the semiconductor space, we believe that Taiwan Semi is a great growth-stock for the long term.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the March 18th, 2020 lows of around $42 to the $142 all-time highs in mid-February, 2021. This represented a whooping 238% gain for the stock in less than a year. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few massive 10% corrective movements that took place during this strong uptrend, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains the undisputed leader in the Semiconductors space. TSMC has not only established itself as the leader in the sector that it operates in but has also managed to defend its leading position against all of its western comptetitors. This in turn has turned the stock into a go-to choice for both small retail and large institutional investors looking to add some tech-related exposure to their portfolios.

We will start buying the stock around the $115 support area. Should the price drop further in the short-term, we would be buying even more aggressively at the next strong support at $108 where more buying pressure is expected and it would give us a chance to get a better average price on our long positions. Our initial profit-taking target is set at $150, followed by the next target at $165 where we would be fully cashing in our profits.

The stock is currently sitting at $118 per share, which is roughly 17% below its all-time highs of $142 per share. We saw the stock finding a lot of buying interest around the $115 for a 4th time in the last 2 months. The confluence of the horizontal, diagonal and the 100 DMA dynamic support lines there have continued to bring a lot of buyers back to the market every time the price drops there. In the aftermath of the Q1 earnings call where the company talked about the limits in its production capacity and the general inability to service all of the chip demand at the moment, some investors saw that as a reason to start selling the stock, which resulted in a short-term decline from $122 down to the $115 strong support zone. As you know and as we have mentioned many times before, panicking has never made anyone any money. While we understand that TSM is not necessarily a cheap stock from a value perspective, it is important to remember that this is a high-growth stock, that continues to report remarkable numbers and beating the street’s estimates. The better growth opportunity that a certain stock represents, the more expensive it tends to be as investors are pricing in that future growth into today’s price. Investors should see the recent price declines as an opportunity to buy into the leader in the semiconductor space at a 17% discount after a strong Q1 earnings report. In our view this is definitely an opportunity that every growth oriented investor should look at. We believe that the recent declines are heavily overdone and that the stock will find enough buying interest at the current levels, to resume its uptrend. Could the stock go lower? Of course it could.. any stock could go lower, but that is not the point. As a growth-oriented investor you have to be ready to take on some pain (stock price declines) from time to time when you are chasing after the high double-digit annual growth. Basically, this is the price you have to pay for owning these names. However, with the proper risk-management and portfolio positioning, this short-term speed bump could prove to be a phenomenal opportunity for generating outstanding profits in the months ahead.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK and XLY will be some of the best performing sector US ETFs in May. However, it is important to note that the loose monetary policy with artificially low interest rates and constant money printing is a net negative for the US dollar in the short term. Thus, we are bullish on Emerging markets, in the next 2-4 months as most of the emerging market economies have US dollar denominated debts. If the US dollar continues to weaken that would make it easier for some of these emerging economies to repay their debts. However, as we continue to see the US economy recovering and we move pass the global pandemic the Federal reserve will be forced to raise the benchmark interest rates in the US, which will end up boosting the dollar and could result in an Emerging market debt crisis in 6-12 months. This is the main reason why we decided to include the EEMiShares MSCI Emerging Markets ETF in one of our ETF Correlation Analyses for the month of May.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. TSMC has definitely been one of the biggest winners in terms of stock price appreciation throughout the last 12 months, thus we are strongly bullish on TSM’s stock in both the short and long term. Additionally, we are seeing TSM as a great way of playing the major 5G, IoT, AI and VR boom that is currently happening. The most recent price corrections should be treated as a great opportunity to buy this strong performing stock at a remarkable discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now steadily pushing higher, thus signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as the products and services that these tech companies offer are at the forefront of the 4th Industrial revolution or in other words the Digital Age. This makes us optimistic for the future performance of TSMC as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of TSMC with the large number of growth-related initiatives, leading market position the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a 17% discount from the all-time high levels, we would like to point out that buying at these levels would be suitable for both risk-oriented and risk-averse investors. Thus, we are currently looking at the $115-125 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $150 and $165 respectively.

Honeywell International (HON)

Honeywell International Inc. is an American publicly traded, multinational conglomerate headquartered in Charlotte, North Carolina. It primarily operates in four areas of business: aerospace, building technologies, performance materials and technologies (PMT), and safety and productivity solutions (SPS).

Honeywell is a Fortune 100 company, and was ranked 92nd in 2019. The company has a global workforce of approximately 110,000 workers, with approximately 44,000 employed in the United States.

Honeywell has been innovating for more than 100 years – and now they are creating what’s next.

In its Aerospace business segment, the company focuses on more fuel-efficient aircraft, more direct and on-time flights, safer skies and airports. The company’s technology and products could be found on virtually every commercial, defense and space aircraft.

In its Building Technologies segment, Honeywell has spent over a century in constantly redefining energy efficiency by not only making indoor comfort automatic but also introducing new and innovative technology solutions. Today, there are over 10 million buildings using their technology

In its Performance Materials & Technologies segment, the company has high degree of expertise in building complex industrial facilities and creating high-quality and high-performance chemicals and materials, as Honeywell was once the pioneer in automation control.

Through its Safety & Productivity Solutions business segment, the company directly impacts the lives of over half a billion workers around the world. Honeywell International helps these individuals to be safer and more productive with voice-enabled software, barcode scanners, mobile computers and protective equipment.

Current Position – Financial Performance and Future Growth Prospects

Following the economic recovery and the general reopening theme we have seen strength in the defense and space businesses in the US. After seemingly being able to get the COVID-19 pandemic under control with over 200 million Americans already vaccinated, the government is now more willing to spend money on its defense and space contracts. Companies like Honeywell International are always the primary beneficiaries when the government opens up its checkbook, as it means more business to them. The US government is by far the largest defense client in the world and for most of the companies in that space the work with the government represents more than 50% of their total revenues. In the case of Honeywell that is not true as the company has a very well balanced and diversified portfolio of products and services spread across 4 major categories: Aerospace (31%), Performance Materials and Technology (27.8%), Honeywell Building Technologies (16.1%), Safety and Productivity Solutions (25.1%).

In the Aerospace segment the company provides integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations.

In the PMT segment Honeywell offers leading technologies and high-performance materials, including hydrocarbon processing technologies, catalysts, adsorbents, equipment and services. This segment includes its wholly owned subsidiary, Honeywell UOP, which is an international supplier and licensor of process technology, and consulting services to the petrochemical and petroleum refining industries.

The HBT segment provides environmental & energy solutions, security and fire, and building solutions, by offering sensors, switches, control systems and instruments for energy management

The SPS business includes sensing & productivity solutions and industrial safety, as well as the recently acquired Intelligrated business.

The company has enjoyed a strong demand for warehouse automation products, which is expected to ac as a positive catalyst for the company’s revenues. Personal protective equipment has been another strong growth area for Honeywell where the company is sitting on a meaningful backlog of orders. Honeywell International stands out with a remarkably strong cash flow position, which allows it to deploy capital for making acquisitions and paying out dividends.

Honeywell has managed to do a very good job of deploying several cost-control measures during the pandemic in attempts to maintain and preserve the company’s capital structure. Most of the company’s discretionary expenses were reduced as the company has been trying to free up some capital and save it. While some might argue that a company of that size needs to do more if it really wants to impact its financial position in a meaningful manner, Honeywell still managed to save over $1.5 billion year over year in 2020, which in our view is an impressive number. We also believe that cost-control measures combined with the operational and leadership excellence at the company, will guarantee a further margin expansion in the mid and long term. Last but not least, Honeywell has also shown that it stays on top of all current trends when it comes to innovation and new initiatives. The three most promising initiatives that are expected to drive the company’s growth and profitability include the Connected Enterprise, Integrated Supply Chain and Honeywell Digital.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the March 23rd lows of 2020 around $99 to the $232 all-time highs in mid-April, 2021. This represented an astonishing 134% gain for the stock in a year. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few massive 15-20% corrective movements that took place during this strong uptrend, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains one of the leaders in the aerospace and defense space. The way that Honeywell has managed to evolve and branch into other high-growth sectors like high-performance materials and energy solutions has really turned the company into an industrial giant. The stock is now a go-to choice for both small retail and large institutional investors looking to add some cyclical exposure to their portfolios.

We will start buying the stock around the $210-220 support area. Should the price drop further in the short-term, we would be buying even more aggressively at the next strong support at $195 where more buying pressure is expected and it would give us a chance to get a better average price on our long positions. Our initial profit-taking target is set at $250, followed by the next target at $265 where we would be fully cashing in our profits.

The stock is currently sitting at $228 per share, which is just 2% below its all-time highs of $232 per share. We saw that the stock found a lot of buying interest around the $220 support zone, which was a very good sign for the bulls. The confluence of the horizontal, diagonal and 100 DMA dynamic support lines is currently spanned across the $210-220 area and is expected to continue to bring a lot of buyers back to the market every time the price drops there. The stock has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The stock has moved up with more than 20% since then, which really shows that there is a lot of momentum behind that move. Recently, the stock reported remarkable Q1 financial performance results, surpassing the consensus estimates on both the top and bottom line. The most recent 5% mini-correction was viewed by most investors as a great opportunity to buy into one of the cyclical heavyweights at a discount and at a relatively fair P/E valuation. The recent failure of the price to break below the $220 support back in early May and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the coming weeks.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLI will be one of the best performing sector ETFs in May.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit companies like Honeywell tremendously, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and potential resurgence of new infections, the new administration in the US, the economic recovery, inflation, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Honeywell International, has definitely been one of the biggest winners in terms of stock price appreciation throughout the last 12 months, thus we are strongly bullish on HON’s stock in both the short and long term, as we believe that the economic landscape will become even more favorable for Honeywell moving forward.

Additionally, we are seeing HON as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The most recent price corrections should be treated as a great opportunity to buy this strong performing stock at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now moving higher again, thus signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the fact that the XLI and the Industrial sector as a whole would continue to attract a lot of the investors’ attention moving forward, as they will be the primary beneficiaries of the huge Infrastructure bill that will be passed in the coming months. This makes us optimistic for the future performance of HON as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of HON with the large number of growth-related initiatives, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 2% from the all-time high levels, we would like to point out that buying at these levels would be more suitable for risk-oriented while risk-averse investors should wait for a 5-10% correction before jumping in on the Long side. Thus, we are currently looking at the $210-220 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $250 and $265 respectively.

Sincerely,

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