We recently compiled Goldman Sachs’ Best Hedge Fund Stocks list: Top 20 Stocks. In this article we’ll look at how Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) ranks against the other Goldman Sachs hedge fund stocks.
The end of August marked the beginning of a long-awaited paradigm shift on Wall Street that investors had been waiting for for months. The shift came after Federal Reserve Chairman Jerome Powell acknowledged that it was finally time to cut interest rates. Investors rejoiced, with the flagship S&P index rising 1.15% and the Dow Jones Industrial Average rising 1.14%.
Prior to the Fed chairman’s comments, investment bank Goldman Sachs had already been working in detail on the impact of a rate cut on the stock market. Josh Shifrin, head of trading strategy at the bank, explained in a podcast that the prospect of the Fed cutting interest rates “is very closely linked to the performance of short-term bonds.” However, he added that “it’s really bonds that have reacted, and the story is very clear,” noting that the movement in index levels has been “sluggish” because “the stock market is range-bound and there’s a lot of rotation between different sectors.” This makes sense considering how the Dow and S&P have performed since Powell’s latest comments, as their 1 percentage point gains in each indicate that investors were well prepared for a rate cut even before the Fed chairman spoke.
Regarding the flagship S&P index, John Flood, head of US equity sales trading at GS, offered some insights at the close of trading in June. Starting by highlighting the drivers of the index’s performance in the first half of the year, Flood explained that when it comes to hedge funds, artificial intelligence and GLP-1 were the two main trends that drove the index’s returns. He described this as a “long momentum trade” in which “both crowds on the hedge fund side” — “systemic and fundamental long and short” — were fully involved in the trade.
Goldman’s head of equities also added that retail investors are finally back and that they are “focusing on the 10 biggest stocks in the world.” To find out who these companies are, read the 20 biggest companies in the world by market capitalization in 2024. The biggest concern among investors and analysts this year is the polarization of market returns, with only the best performing companies making most of the profits. This is also a concern of analysts at another well-known Wall Street bank, who added that it has created an opportunity to make more profits. Flood said that although five stocks account for “60% of the S&P 500’s year-to-date return,” this large disparity does not worry him.
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Also see Morgan Stanley’s 15 Best AI Stocks in Europe and Morgan Stanley’s Best Humanoid Robot Stocks.
Investor optimism around AI has flowed, driving shares of the world’s top AI GPU designer to an incredible 321,150% return to record highs, but it has also raised concerns that the market may once again experience a period similar to the ill-fated dot-com era of the 1990s. When asked if this period reminds him of that time, Flood responded that his company “feels closer to 1995 than 1999, and 1995 was obviously a very good year for the stock market, and it was performing well.” In particular, “the valuations and earnings of the market leaders are doing much better today than they were in 1999.” Finally, the analyst said he feels “very bullish,” and also shared his predictions for flagship stocks, the S&P. What’s the prediction? Flood thinks “with the biggest stocks getting even bigger and the election news continuing to be a bit of a hiatus, the S&P 500 could trade well above 6,000 this year.”
The market bifurcation between large and small companies was also on the mind of Ben Snyder, Senior US Portfolio Strategist at GS. He commented on the July surge in small caps, which rose by up to 2% while other indexes fell by up to 1.98% as investors prepared for a possible interest rate cut. Snyder explained that small caps tend to have more debt, which translates into big gains when lower interest rates combine with lower market value. “If just 1% of assets flowed out of the S&P 500 and into, say, the Russell 2000 Small Cap Index, then 1% of the S&P 500’s market cap would represent more than 15% of the Russell 2000’s market cap,” he said. Returning to the topic of AI, the Goldman strategist has some advice for those worried that the hype around AI is outstripping the technology’s ability to benefit the companies that plan to pour $1 trillion into it: “If you’re concerned about the concentration of AI investments,” he said, it might be wise to invest in an equal-weighted variant rather than the market-cap-weighted benchmark S&P.
Speaking of AI, GS also released a detailed report in July, analyzing the year-to-date returns of various AI sectors. The AI stack, broadly speaking, consists of four categories of companies. From the bottom of the pyramid upwards, there are chipmakers and designers, companies that provide AI capabilities such as server farms, companies that sell AI products, and finally, companies that will benefit most from the ubiquitous or near-ubiquitous adoption of AI. According to GS, as of late July, these four sectors had year-to-date returns of 139% (top AI GPU stocks only), 22%, -2%, and 2%, respectively. One of the best-performing companies within the AI infrastructure segment is utilities, which analyst Ryan Hammond believes “after adjusting valuations for the improved long-term EPS growth expectations the sector has experienced, utilities’ PEG (P/E to Long-Term Growth (LTG)) ratio is 2x, well below its historical average of 3x,” leaving room for growth going forward.
So GS decided to take a broad look at the market to see which hedge fund stocks are favored by the bank.
To compile Goldman Sachs’ list of top hedge fund stocks, we ranked the bank’s list of stocks by the number of hedge funds that had the stock among their top 10 holdings, based on data from the bank.
We also mentioned the total number of hedge funds that bought these stocks, according to Insider Monkey data. Why would you care about the stocks that hedge funds are flocking to? The reason is simple: our research shows that by mimicking the top picks of the best hedge funds, you can outperform the market. Our quarterly newsletter strategy, which selects 14 small- and large-cap stocks each quarter, has returned 275% since May 2014, beating its benchmark by 150 percentage points (more on that here).
A close-up of the complex network of integrated circuits used in logic semiconductors.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of hedge fund investors in Q2 2024: 156
Number of GS funds: 30
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s largest contract chip manufacturer. The billions of dollars of investment required to set up a state-of-the-art chip manufacturing plant, along with decades of technology research and expertise, have given Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) one of the largest defenses in the industry. The company currently manufactures the world’s most advanced chips, marketed as 3-nanometer or N3. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has enjoyed multiple catalysts due to its ability to produce defect-free chips at scale. For example, the company is the sole manufacturer of Apple’s in-house processors, and Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is also a key NVIDIA partner that not only manufactures AI GPUs but also provides the technology to assemble them into a usable format. These technologies, known as packaging, have also proven to be the biggest constraint in the supply of AI chips, with Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) spending a lot of capital to expand production. However, the company’s location in Taiwan makes it vulnerable to geopolitical conflicts in the region, posing its biggest long-term risk.
ClearBridge Investments mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in their investor letter for Q2 2024. Here is what the company said:
“However, it strengthened its semiconductor business with the acquisition of Taiwan Semiconductor (TSM) this quarter. TSM, while outside of our benchmark, is a global manufacturing provider of choice. The importance and sophistication of its manufacturing base supports all leading edge fabless semiconductor companies, including Apple, Nvidia, Qualcomm, AMD and Broadcom. AI is driving the data center upswing, while PCs and mobile are at the bottom of the cycle and half of its business is headed for recovery.”
Overall, TSM ranks 7th on Goldman Sachs’ list of hedge fund stock picks. While we acknowledge TSM’s potential as an investment, we believe that some AI stocks have a better chance of delivering higher returns in the short term. If you’re looking for AI stocks that are more promising than TSM but still trade at less than 5x TSM’s share price, check out our report on the cheapest AI stocks.
Read next: The $30 Trillion Opportunity: The 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and NVIDIA Has “Become a Wasteland” According to Jim Cramer.
Disclosures: None. This article was originally published on Insider Monkey.
