Although inflation shows signs of easing, market sentiment has been dampened due to the recent bank crisis fueling investors’ fears of the economy tipping into a recession. Amid the recessionary backdrop, Taiwan Semiconductor Manufacturing Company Limited (TSM), a leading semiconductor manufacturer, and Diageo plc (DEO), a consumer staple company, are expected to perform well and generate solid returns. Let’s discuss why.

According to the latest inflation data from the Bureau of Labor Statistics, consumer prices rose 0.1% in March and 5% from the previous year, lower than estimates of 0.2% and 5.1%, respectively. This marked the ninth consecutive month of inflation deceleration.

According to the Fed minutes from the March meeting, the fallout from the recent banking crisis is expected to push the economy into a recession later this year.

Despite a challenging macro environment, the semiconductor industry is well-poised to witness significant growth and expansion in the foreseeable future, driven by the sustained demand for chips with rising applications across various sectors and favorable corporate and federal investments. The global semiconductor market is projected to exceed $1 trillion by 2030, growing at a 7% CAGR.

Therefore, fundamentally strong chip stock TSM could be worth investing in to capitalize on the chip industry’s tailwinds.

In addition, investors could consider buying quality consumer defensive stock DEO, which could be a good hedge against current market uncertainties due to steady demand for its goods. On top of it, the global beverage market is projected to grow at a 3.5% CAGR to $1.99 trillion in 2028, which could aid this beverage producer. 

Let’s take a closer look at the fundamentals of the featured stocks:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

Headquartered in Hsinchu City, Taiwan, TSM produces, tests, packages, and sells semiconductor devices and integrated circuits globally. It specializes in various wafer fabrication processes to create semiconductors and offers customer support, engineering services, and mask manufacturing.

On February 14, TSM’s board of directors authorized a $3.50 billion capital injection plan for TSM Arizona. In December 2022, the company tripled its commitment to the Arizona chip facility to $40 billion, one of the biggest foreign investments in U.S. history. These strategic developments could benefit the company significantly.

On December 29, TSM announced that its 3nm technology had achieved volume production with good yields, which was duly celebrated with the topping ceremony of its Fab 18 Phase 8 facility. The company believes 3nm technology could generate end products worth a staggering $1.50 trillion within five years of achieving volume production.

TSM’s net revenue increased 42.8% year-over-year to $19.93 billion in the fourth quarter that ended December 31, 2022. Its gross profit grew 68.7% from the year-ago value to $12.40 billion. The company’s net income increased 77.8% from the prior-year period to $9.43 billion, and its earnings per share stood at $0.36, an increase of 78% year-over-year.

The consensus revenue estimate of $89.62 billion for the fiscal year (ending December 2024) reflects a 20.2% year-over-year improvement. Likewise, the consensus EPS estimate of $6.80 for the same year indicates a 23.1% rise year-over-year. Moreover, the company surpassed its consensus EPS estimates in all four trailing quarters, which is impressive.

The stock has gained 35.5% over the past six months to close the last trading session at $86.87.

TSM’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

TSM has an A grade for Quality and Momentum. It is ranked #21 in the B-rated 91-stock Semiconductor & Wireless Chip industry.

In addition to the POWR Ratings I’ve just highlighted, you can see TSM’s ratings for Growth, Value, Stability, and Sentiment here.

Diageo plc (DEO)

Based in London, the United Kingdom, DEO produces, markets, and sells an extensive range of alcoholic beverages, including scotch, whiskey, gin, vodka, rum, wine, tequila, beer, and non-alcoholic products. In addition, its offerings include ready-to-drink products, raki, liqueur, Canadian whisky, American whiskey, cachaca, and brandy.

On March 10, DEO announced that it had acquired Don Papa Rum, a super-premium dark rum from the Philippines. This acquisition aligns with DEO’s strategy of acquiring high-growth brands with attractive margins that support premiumization. It could enhance DEO’s revenue, profitability, product portfolio, and brand image.

Also, On November 2, DEO announced the acquisition of Balcones Distilling, a leading producer of American Single Malt Whisky and a Texas craft distiller. This acquisition of Balcones might benefit the company by adding a top producer of American Single Malt Whisky to its whiskey portfolio, diversifying its product range, and supporting its strategy of acquiring high-growth brands in fast-growing segments.

The company’s net sales increased 18.4% year-over-year to £9.42 billion ($11.76 billion) during the six months that ended December 31, 2022. Its gross profit grew 15.9% year-over-year to £5.80 billion ($7.23 billion). The company’s profit for the period rose 15.3% from the prior year’s period to £2.41 billion ($3 billion), and its EPS stood at £1.006, up 19.8% year-over-year.

Analysts expect DEO’s revenue to grow 15.6% year-over-year to $21.73 billion for the fiscal year ending June 2023. The company’s EPS for the ongoing year is expected to rise 15.5% year-over-year to $8.42. Shares of DEO have gained 11.5% over the past six months to close the last trading session at $185.42.

DEO’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

DEO has a B grade for Quality, Sentiment, and Stability. It is ranked #15 out of 37 stocks within the A-rated Beverages industry.

Click here to access additional DEO ratings for Growth, Value, and Momentum.

What To Do Next?

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TSM shares were trading at $87.50 per share on Thursday afternoon, up $0.63 (+0.73%). Year-to-date, TSM has gained 17.95%, versus a 8.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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