Portfolio holding Taiwan Semiconductor Manufacturing (NYSE: TSM), the biggest independent foundry supplier to the chip industry, has performed well since our recommendation a little over three years ago, returning around 124 percent.

Source: Bloomberg

The stock remains one of our favorites. The overall technology sector has been growing steadily, especially as consumer electronic devices become more pervasive. Today’s smartphones use 4 to 5 times more semiconductor chips than the previous generation of mobile phones. For now, Taiwan Semiconductor is well positioned to ride the smartphone growth wave, with 53 percent of its sales related to communications.

The semiconductor sector has been adept at curtailing oversupply, while also leading the way in innovation and new patents. That said, Taiwan Semiconductor has been ramping up production of its high-performance 28 nanometer (nm) graphics processing units (GPU). A nanometer is one billionth of a meter; as companies migrate to 28nm chips, semiconductor makers such as Taiwan Semiconductor stand to benefit from the transition. The company now anticipates that this product line will account for 10 percent of sales by the second half of this year.

Programmable logic device maker Xilinx (NSDQ: XLNX) has already announced it will switch foundries to Taiwan Semiconductor when Xilinx migrates to 28nm chips. The company previously worked with Taiwan Semiconductor’s rival foundry United Microelectronics Corp (NYSE: UMC). That’s a testament to Taiwan Semiconductor’s technological prowess.

In addition, as companies boost their use of 28nm chips, Taiwan Semiconductor should see new orders from Japanese integrated device manufacturers (IDM) such as Fujitsu (OTC: FJTSY) and Toshiba Corp (Japan: 6502), as Japanese IDMs have apparently decided to outsource the manufacturing of 28nm chips.

Demand for application processors (AP) for smartphones and tablets should also increase next year. The market has already dissected and forecast sales numbers for Apple’s (NSDQ: AAPL) popular iPad and iPhone. This means that the real game will be played in non-Apple tablets, and Taiwan Semiconductor produces chips for all non-Apple tablets that use APs.

The faster these tablets sell, the more APs will contribute to Taiwan Semiconductor’s business. Amazon.com’s (NSDQ: AMZN) entry into the tablet space with its new Kindle Fire and the introduction of Microsoft’s (NSDQ: MSFT) Windows 8 operating system should also play a role in boosting Taiwan Semiconductor’s AP business.

The company expects to invest around USD6 billion this year to expand production for its 28nm chips and build production capacity for the 2013 rollout of its 20nm chips. This spending isn’t a problem for a company with USD4 billion in cash on hand and strong cash flows, while these investments should help Taiwan Semiconductor maintain its market leadership in advanced process technology.

On April 26, the company reported that first-quarter 2012 earnings increased 6 percent from the same period a year ago. The company expects solid performance for the rest of the year, with sales on track to increase around 20 percent on a quarterly basis.

The stock has moved above our USD15 buy target; our recommendation is to resist chasing it and only buy at levels around USD15 and below. If the stock already graces your portfolio, continue to hold it. Buy Taiwan Semiconductor Manufacturing up to USD15.