What do a Taiwan-based pure-play semiconductor foundry, a China-based electric vehicle manufacturer, and a U.S.-based biotechnology company have in common?
The businesses in question are Taiwan Semiconductor Manufacturing (NYSE:TSM), Nio (NYSE:NIO), and Gilead Sciences (NASDAQ:GILD). These companies are riding solid long-term structural tailwinds and have strong balance sheets that can enable them to capitalize on the opportunities. Besides, the three companies are currently trading at levels significantly below their all-time highs — which is surprising considering the ongoing stock market rally.
Investors can earn attractive returns from any of these fundamentally strong stocks from an investment of as little as $1,000, provided this money is not needed to pay bills or as contingency funds.
1. Taiwan Semiconductor Manufacturing
An exceptionally smart way to invest $1,000 right now would be to buy shares of Taiwan Semiconductor Manufacturing.
The pandemic-related spike in demand for consumer electronics added to the already elevated chip demand from areas such as 5G, Wi-Fi 6/6E, the Internet of Things, high-performance computing, and artificial intelligence. However, COVID-19-related supply chain disruptions, U.S.-China geopolitical tensions, and the unexpectedly cold winter in Texas have resulted in a global chip shortage. TSM is now taking steps to assuage this problem and has announced plans to invest $100 billion over the next three years in capacity expansion and research and development. However, the company expects the demand-supply mismatch to persist till 2022. Yet with TSM currently accounting for 57% of global chip production, the company is best positioned to benefit from this dynamic in terms of pricing power.
Advanced chips (7nm and smaller) accounted for 49% of the company’s revenues in the first quarter of fiscal 2021 (ending March 31, 2021), much higher than the 35% revenue exposure in the same quarter of the prior year. The company has started generating revenues from 5nm nodes, while a 3nm node has yet to reach the mass production stage. Smartphone manufacturers are increasingly preferring smaller nodes for their high computing capability and power efficiency. With high-volume customers such as Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM), the company’s technological edge is translating into robust revenue streams from the smartphone vertical.
While competitors such as Intel (NASDAQ:INTC) and Samsung have also unveiled aggressive capacity expansion plans, their success is far from guaranteed. Against this backdrop, TSM emerges as a superior pick, especially since it also pays a dividend yield of around 1.5%. Hence, although TSM is currently trading at 11.6 times trailing-12-month (TTM) sales, which is not cheap, investors can still earn robust returns from this stock in coming months.
Investors can also put their $1,000 to good use by picking up Nio. This stock has slumped over 38% from its all-time high of $66.99 in early January 2021. The company’s woes stem mainly from retail investors shifting out of growth stocks into value picks and from the semiconductor shortages afflicting the entire automotive industry. It also did not help that the company missed its consensus earnings estimate in the fourth quarter of fiscal 2020 (ending December 31, 2020).
Despite all these setbacks, the structural tailwinds powering Nio are too strong to ignore. In 2020, China accounted for around 41% of global EV sales. Canalys estimates that 1.9 million EVs will be sold in China in 2021, a year-over-year increase of 51%. While EVs are expected to account for 9% of total automotive sales in China in 2021, the percentage is expected to increase to 35% by 2025. With the backing of the Chinese government and big technology companies such as Tencent (OTC:TCEHY) and Baidu (NASDAQ:BIDU), Nio is well positioned to capture a significant share of China’s ever-expanding EV market.
Nio is now guiding for first-quarter revenues in the range of $1.13 billion to $1.16 billion, which implies year-over-year growth of 438% to 451%. These estimates are in line with Nio’s 423% year-over-year rise in vehicle deliveries to 20,060 units in the first quarter. The company is expecting short-term pressures from semiconductor shortages in the second quarter. However, Nio has a history of underpromising and overperforming — the company has surpassed its delivery target of 19,500 vehicles in the first quarter.
Nio’s battery-as-a-service (BAAS) operating model allows customers to purchase EVs without batteries at lower upfront prices and then pay for batteries through monthly subscriptions. EV charging requires one and a half to two hours, but with this model EV users can swap an uncharged battery for a fully charged or even an upgraded battery in a matter of minutes. Currently operating 193 battery swapping stations in China, the company aims to expand the number to 500 by end of 2021. As Nio sells more vehicles, its BAAS revenues will continue to grow even faster. BAAS revenues are also recurring, which implies higher revenue visibility and lower top-line volatility for the company.
Nio is trading at 25.7 times TTM sales, which is quite rich. However, investors can earn handsome returns from investing in this stock even at these elevated levels, considering that Nio has a solid strategy to capitalize on the huge EV opportunity in China.
3. Gilead Sciences
Finally, Gilead Sciences can be a very smart place to put $1,000, especially for a risk-averse investor. The company pays a solid dividend yield of 4.3%, much higher than the S&P 500’s yield of 1.4%. With a TTM dividend payout ratio of 46.25%, the company has sufficient financial flexibility to continue with its dividend policy in the foreseeable future.
However, this high-yield stock has declined over 15.8% in the last year. The first COVID-19 treatment for hospitalized patients approved by the U.S. Food and Drug Administration (FDA), Veklury may soon fall out of favor as increasing vaccination reduces the number of patients under treatment. In November 2020, the World Health Organization (WHO) recommended against using Veklury, which put a dent in the drug’s sales.
But there is much more to Gilead Sciences than Veklury. The company dominates the HIV market and is also developing a significant presence in the oncology segment. To offset the impact of generic erosion of older HIV drugs such as Atripla and Truvada, Gilead Sciences has been focused on introducing new HIV drugs with better efficacy and safety profiles. The company’s recently launched HIV drug, Biktarvy, is the top-prescribed drug for U.S. HIV patients. The company also expects to submit an application to the FDA for Lenacapavir as a long-acting treatment (to be injected once every six months) for heavily pretreated HIV patients. In oncology, Gilead Sciences is betting on cell therapy drug Yescarta and Trodelvy, a drug for breast and urothelial cancer (a common type of bladder cancer). Additionally, Trodelvy has the potential to be approved in several other solid tumor indications.
Gilead Sciences returned $5 billion or almost 67% of its total free cash flow to shareholders in the form of dividends and share repurchases in 2020. Despite several attractive assets and favorable shareholder policy, the stock is trading at only 3.3 times TTM sales. This cheap stock is an attractive bet for both value and income investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.