The Apple Supplier Flashing Buy

Rumors are swirling TSM could manufacture Apple's new chips

by Karee Venema

Published on Dec 5, 2017 at 12:46 PM

Tech stocks have been in a rout following last week's bearish note at Morgan Stanley. For chip stock Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM), this has translated into an 8.7% drop from its Nov. 24 record high of $43.02. Nevertheless, shares of the Apple (AAPL) supplier are now trading near a trendline that has signaled buying opportunities in the past -- and coincides with another potential support level at the stock's mid-October pre-bull gap highs -- suggesting it could be a prime time to join TSM stock on its next leg higher.

Specifically, the security is now trading within one standard deviation of its 80-day moving average. Looking back over the past three years' worth of data, Schaeffer's Senior Quantitative Analyst Rocky White found similar times TSM has retreated to this trendline after closing north of it at least 60% of the time during the last two months -- and has traded north of here in at least eight of the last 10 trading days.

tsm stock daily chart dec 5

Following the nine other times this signal has flashed, the equity has gone on to average a 21-day gain of 4.74%, and has turned in a positive one-month return 89% of the time. Based on TSM's current perch, another move of this magnitude would put the shares near $41.20.

The stock could find additional support in the options pits, too. Short-term traders are unusually put-skewed on TSM, per the equity's top-heavy Schaeffer's put/call open interest ratio (SOIR) of 2.63 -- in the 97th annual percentile. Most of this open interest is centered at the January 2018 39-strike put, which is home to 10,186 contracts. This could create an options-related floor for the Taiwan Semiconductor into the new year, as the hedges related to these bets unwind ahead of expiration.

Meanwhile, those looking to profit from the possible buy signal near TSM's 80-day trendline may want to consider short puts. The stock's 30-day at-the-money implied volatility of 22.9% ranks in the 80th annual percentile, suggesting elevated volatility expectations are being priced into short-term contracts. This makes it more attractive to sell premium, versus buy it.

Separately, rumors recently surfaced that Taiwan Semiconductor could be tapped to manufacture Apple's new chips. Specifically, the Nikkei reported last Thursday that the iPhone maker is designing its own in-house power management chips, and could be solely made by TSM.

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