How Exposed Are Cloud, Communication Stocks To An Economic Crash?

With market uncertainty and concern over the remaining longevity of the bull market growing, Oppenheimer analyst Timothy Horan recently took a look at risk levels among communication and cloud stocks.

In a new report, Horan discussed which companies could be most exposed if the economy takes a turn for the worse.

Playbook

According to Horan, the maturing cloud industry and relatively solid valuations and balance sheets of many companies in the space will make the next recession a lot less scary than the last recession in 2008.

The first sign of trouble for some companies could be widening high-yield spreads. Current high-yield rates broke 8 percent last week, and 18-month spreads recently hit 6.1 percent – their highest level in three years. Horan noted that widening spreads can be bad news for highly-leveraged companies.

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Familiar Names

Horan pointed out that large carriers have typically been solid defensive plays during past recessions. “In the 2007-09 time frame, the telcos saw a 25 percent increase in their S&P weighting, but emerging telecom saw a 50 percent underperformance,” he wrote.

Risk Matrix

According to Oppenheimer’s Recession Risk Matrix, Cogent Communications Holdings Inc CCOI, Verizon Communications Inc. VZ and AT&T Inc. T are the three communication and cloud stocks with the least risk exposure during a potential recession.

The two stocks with the most risk exposure are Internap Corp INAP and Sprint Corp S.