We recently compiled a list of the 12 Best ADR Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other best ADR stocks.
American Depositary Receipts (ADR) are US-listed securities that represent shares in foreign companies, allowing American investors to gain exposure to international equities without dealing with foreign exchanges or currencies. Unlike regular shares of domestic companies, ADRs are issued by US banks and trade on American exchanges, typically in US dollars. While they provide easier access to foreign markets, ADRs can carry additional risks such as currency fluctuations, geopolitical factors, and differences in accounting standards or regulatory environments. Investors should also note that ADRs come in two forms: sponsored and unsponsored. Sponsored ADRs are issued in partnership with the foreign company and typically offer more reliable financial reporting and investor communication. Unsponsored ADRs, on the other hand, are created without the company’s direct involvement and may have limited information available, making due diligence more challenging.
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ADRs were not particularly popular in the last 15 years, as the US stock market has been the best-performing developed market since the 2008 financial crisis, significantly and consistently outperforming all major European markets as well as the Chinese stock market. The US stock market has massively benefited from the US’s technological leadership and the emergence of tech giants with multi-trillion-dollar capitalizations, a more favorable business environment with lower tax rates, more aggressive financial stimulus, and, more importantly, significantly higher productivity growth vs. other regions. As a result, the US stock markets not only delivered higher earnings growth but also experienced the largest increase in valuations compared to Europe and China. The latter is partially attributed to foreign capital flowing into the US market as investors recognized the superior growth opportunities of US companies.
The recent political developments initiated by the Trump 2.0 regime have set the stage for a potential reversal of the aforementioned trends, which may drive relative outperformance of foreign markets and make ADRs attractive again. First, the Trump 2.0 tariff turmoil and massive cuts in federal spending are likely to cause an economic slowdown and thus cut the earnings growth potential of domestic companies. Second, the threat of tariffs imposed on the USA’s allies is already causing retaliatory measures, including the potential substitution of American products for European or Canadian alternatives (again, this endangers the earnings growth potential of US domestic companies while boosting the potential of European and Canadian companies). Third, Europe has recognized that the US has become a less reliable partner, as evidenced by the major shift in policies of the new administration, and is already taking steps to ensure its independence and minimize dependence on the US. This is illustrated by the recent decision of Germany to create a €500 billion infrastructure fund to boost its defense capabilities (funds which are planned to be spent primarily on European contractors). Last but not least, the increasing tensions between the Western allies could potentially drive a return of European capital to the European continent, which may cause a relative valuation repricing in favor of the European stock market.
With that being said, the key takeaway for readers is that the current developments in the US and Europe suggest a potential break of the trend in which the US strongly outperformed Europe and China for the last 15 years. In this context, gaining more international exposure through ADRs could be a great way to not only hedge domestic risk but also gain exposure to new emerging tailwinds such as the accelerating European spending on defense. Both the European and Chinese stock markets have outperformed the US since election day, meaning that there is already strong confirmation for the developments discussed above.
A close-up of a complex network of integrated circuits used in logic semiconductors.
Our Methodology
For this article, we used a Finviz screener to filter all the available ADR stocks. Then we compare the list with our Q4 2024 proprietary database of hedge funds’ ownership and include in the article the top 12 stocks with the largest number of hedge funds that own the stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 186
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is a Taiwan-based global leader in semiconductor manufacturing. It operates as a pure-play foundry, producing integrated circuits for a wide range of customers, including major fabless chip designers. TSM manufactures chips used in smartphones, high-performance computing, automotive electronics, and IoT devices, with advanced process technologies down to 3nm. The company does not design its own chips but focuses exclusively on fabrication, offering services from design support to backend packaging. TSM’s production facilities are primarily in Taiwan, with expansion underway in the US and Japan to support global demand and supply chain diversification.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) reported strong financial performance in the latest Q4 2024, with revenue increasing 14.3% sequentially, supported by robust demand for 3-nanometer and 5-nanometer technologies. For the full year 2024, TSM’s revenue increased 30% in USD terms to $90 billion, outperforming the foundry industry growth. Looking ahead to 2025, management expects another strong growth year with revenue forecasted to increase by close to mid-20s percent in USD. AI-related demand remains particularly robust, with revenue from AI accelerators expected to double in 2025 after more than tripling in 2024.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) announced significant expansion plans, with the capital budget set between $38 billion and $42 billion for 2025, focusing on advanced process technologies, specialty technologies, and advanced packaging. In terms of global manufacturing, TSM’s first fab in Arizona has entered high-volume production in Q4 2024 using N4 process technology, achieving yields comparable to Taiwan fabs. The company is also progressing with expansion plans in Japan and Germany, with the first specialty technology fab in Kumamoto starting volume production at the end of 2024. With regard to technological advancement, TSM’s 2-nanometer technology is on track for volume production in the second half of 2025, while A16 technology featuring Super Power Rail is scheduled for volume production in the second half of 2026. Despite the higher costs associated with overseas operations, which are expected to impact gross margins by 2-3%, TSM maintains its long-term gross margin target of 53% and higher.
Overall TSM ranks 1st on our list of the 12 best ADR stocks to buy according to hedge funds. While we acknowledge the potential of TSM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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