Disentangling the effect of Covid-19 on Taiwan Semiconductor Manufacturing Co's share price

Covid-19 has shaken world markets. One question likely to be on the minds of a lot of investors right now is how economic uncertainty caused by the pandemic will continue to affect large cap shares, such as the share price of Taiwan Semiconductor Manufacturing Co (TPE:2330).

Shares in Taiwan Semiconductor Manufacturing Co are currently trading at 315. But to assess whether the price is likely to fall or rally over the next 12 months, we need an objective way of telling whether it's able to withstand economic shocks and ride out market volatility. To do that, it's essential to look at the profile of the stock to see where its strengths are.

Importantly, we're interested in finding impartial ways of looking at Taiwan Semiconductor Manufacturing Co – something that takes emotion out of the analysis...

The good news is that it scores well against some important financial and technical measures. In particular, it shows signs of being a high quality, strong momentum stock.

Research shows that high quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. Likewise, strong momentum in price and earnings is a pointer to positive trends that have the potential to continue.

Here's why these factors matter:

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Why quality stocks pay off

When it comes to stock analysis, company quality tends to show up in high profitability and strong industry-leading margins. These kinds of firms are stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories with no signs of accountancy or bankruptcy risk.

One of the stand out quality metrics for Taiwan Semiconductor Manufacturing Co is its 5-year Return on Capital Employed, which is a solid 22.8%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.

Harnessing the power of momentum

Positive momentum trends show up in share prices and earnings growth. You can find the clues in stocks that are trading close to their 52 week high prices and outperforming the market. They’ll often be beating broker estimates and getting forecast upgrades and recommendation changes.

This is true at Taiwan Semiconductor Manufacturing Co, where the share price has seen a 41.5% return relative to the market over the past 12 months. Market volatility and economic uncertainty can be a major drag on momentum, but previously strong stocks can be quick to recover when confidence returns.

In summary, good quality and momentum are pointers to some of the best stocks on the strongest uptrends. This combination of factors can be a clue to finding shares that can deliver solid investment profits over many years.

In good times, these shares can become expensive to buy. But in volatile markets, there may be chances to buy them at knock-down prices.

Find the strongest shares in the stock market

Finding good quality stocks with strong momentum behind them is a strategy used by some of the world's most successful investors. If you want to find more shares that meet these rules, you can see a comprehensive list on Stockopedia's StockRanks page.