By Yiannis Mostrous, Global Investment Strategist

As so-called defensive stocks become more expensive, now's the time to consider "cyclicals," such as Taiwan Semiconductor Manufacturing (TSM).

Taiwan Semiconductor reported on July 19 second-quarter 2012 revenues of $4.2 billion, an increase of 21% quarter-over-quarter​ -- an impressive performance considering uncertain global economic conditions. And demand for its advanced 28nm chip is expected to remain strong for the rest of 2012, to support smartphone launches.

Cycles in the semiconductor industry have become shorter and more seasonal than ever before. Taiwan Semiconductor's management estimates that production cuts that began in early June should run their course by the end of August.

That said, the end of the year and the beginning of 2013 will see a slowdown, as demand for mature products bottoms and the supply chain gears up for new products.

Taiwan Semiconductor's innovative technologies have given it leadership in mobile phones and a growing share of the broad-based industrial sector. Many investors don't fully appreciate the contribution the industrial sector is starting to make to the company's bottom line.

Its industrial business has expanded from 10% to 22% of sales, on market share gains made in micro-controllers, touch-integrated circuits, analog/power management and programmable logic. These products enjoy longer product cycles and stable margins.

Taiwan Semiconductor continues to heavily invest in research and development. Its 2012 capital expenditures reached about $8.5 billion, on the high end but still not enough to create overcapacity.

The company has also focused on developing its existing technologies, with its 28nm chip yielding better than originally planned. It also announced for the first time that its 16nm "FinFET" chip will be produced in volume in 2015.

The chip will provide 25% to 30% power reduction at the same speed/standby power versus its 20nm. For mobile products, it allows 15% to 20% speed gains at the same power consumption.

Meanwhile, the company's balance sheet is strong enough to support the capital needed for growth. Cash increased in the second quarter to $7.2 billion. Net of debt, cash now stands at $5 billion.

The company's exposure to communications (50% of sales) will be a big positive for the rest of the year. Moreover, the company's sheer size provides investors with a defensive component during this period of overall market vulnerability.

The stock is trading at attractive valuations, with a 3.5% dividend yield. TSM is a buy up to $15 per share.

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