Buy Taiwan Semiconductor (TSM)

10/20/2009 12:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Sure you want a piece of the technology action. Who wouldn’t after Apple (AAPL) broke to an all-time high after the company announced earnings on October 19. But isn’t everything priced out of reach? After all, we’re not exactly in the early stages of this rally.

I’ve found one late stage tech stock, though, that’s still cheap and that has, in my opinion, lots of potential.

Taiwan Semiconductor Manufacturing (TSM) has about a 50% share of the market for manufacturing other companies’ chips. As chip factories have gotten more and more expensive, more and more chip “makers” have farmed out the actual manufacturing to companies such as Taiwan Semiconductor.

As the biggest contract manufacturer in the world, Taiwan Semiconductor has the cash to constantly push the envelope on chip manufacturing by cramming more and more transistors closer and closer together. The chip industry passed a milestone this year when Intel (INTC), a company that prides itself on its chip-making prowess hired Taiwan Semiconductor to make some chips for it, the first time another foundry had even produced an Intel chip.

Chip makers have exited the chip manufacturing business for a sound reason: The heavy capital spending involved in today’s chip manufacturing makes that part of the industry cyclical in the extreme. When chip demand slumps, a company like Taiwan Semiconductor can see itself sitting with 50% of its capacity idle. So this is a stock that crashes hard when chip demand slows and rebounds late but like a super ball when demand picks up.

And that’s exactly what we’re starting to see clear signs of happening in 2010. I think we’re looking at a pickup in capacity utilization as a result of increasing demand for everything from cell phones to PCs that will push earnings up by roughly 35% at Taiwan Semiconductor Manufacturing in 2010. As of October 20, 2009 I’m adding the stock to Jubak’s Picks with a target price of $12 a share by May 2010.

Full disclosure: I own shares of Taiwan Semiconductor in my personal portfolio and will add to that position three days after this is posted.

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