Taiwan Semi Meeting Resistance

04/27/2010 3:32 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

On Tuesday, April 27, Taiwan Semiconductor Manufacturing (NYSE: TSM), the largest manufacturer of chips for other companies, including Apple (Nasdaq: AAPL) and Intel (Nasdaq: INTC), reported first quarter earnings 10.1% above Wall Street’s expectations. Earnings of $1.07 billion were the highest since the fourth quarter of 2007.

The company said it expects momentum to continue in the second quarter, with sales forecast to rise 8.7% to 10.9% from the level of the first quarter. That would push revenue to a company record for a quarter. Gross margin will climb to 48% to 50% in the second quarter from 47.9% in the first quarter, the company projects.

Ordinarily, that kind of upside guidance would lead me to increase my target price for a stock. But while as a company, Taiwan Semiconductor may be cooking, Taiwan Semiconductor the stock (or actually, ADR, American Depositary Receipt) has a problem that makes me reluctant to raise my target price above the $12.50 a share that I set on January 29.

Look at a long-term chart of the Taiwan Semiconductor ADR and the problem just about reaches out to grab you by the throat. The last time this ADR was above $12.50 was way back in March 2002, when it hit $14.

From October 2000, the year of the technology stock crash, to April 2010, the stock has traded in a range below $12.50. That’s created huge resistance at $12 or so that the stock needs to overcome to move significantly higher. That resistance is made up of all the people who bought at prices up to $12 or so and who would be more than willing to sell out at that price to break even or show a slight profit.

Getting through this kind of multi-year price ceiling can take years. And I’m reluctant to make that kind of time commitment for Jubak’s Picks for any technology stock; the sector is just too volatile. (And although I don’t want to buy them until we’ve seen some kind of correction in the current rally, I think there are better industrial technology bets if your time frame is longer than six months. For three ideas, see this recent post.) So, I’m leaving my target price at $12.50 by May 2010. That’s still roughly 17% above the stock’s price on April 27.

Full disclosure: I own shares of Taiwan Semiconductor in my personal portfolio.

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