Telecom is Dead. Long Live Telecom

The idea, of course, was that a new king was rising up to take the place of the old.  The monarchy as an institution was alive and well; it was just that the head under the crown had changed.

I bring this up because I can see parallels today to the telecommunications sector.  In an information-based economy, telecom has never been as important as it is today.  The modern professional must be “always on.”  It is simply unacceptable for an executive to be without his or her Blackberry; they often times even take it to the toilet.   The internet barely existed at all 15 years ago; today, if your site goes down for five minutes it is an enterprise-level catastrophe. 

Yes, older technologies like the fixed-line phone and the fax are slowly dying (too slowly in the case of the fax, if you ask my opinion), but they are being replaced with data-hungry smart phones and ubiquitous high-speed internet and wifi.  We are communicating more, not less.  Telecom is dead.  Long live telecom. 

Investor perceptions are a funny thing.  In 1999, Investors believed that telecommunications technology would change the world (which it did) and bid the prices of shares to unrealistically high levels.  But today, now that communications are the lifeblood of the economy, investors want nothing to do with the sector.  In Investor’s Business Daily’s industry ranking table, which ranks sectors by their 6-month price performance, Integrated Telecom Services was 87 on a list of 197 sectors.  Telecom-ConsProd, Telecom Services-Foreign, Telecom Infrastructure, and Telecom-Wireless ranked 132, 148, 169, and 177, respectively.

What this tells us is that telecom is not on most investor’s radar screen.  And as contrarians, that means that it should be on ours.  There are some real bargains to be found in this sector.  U.S. giants AT&T and Verizon both yield 7%, as does Spanish/Latin American giant Telefónica.  With large, safe yields like these, you are being paid to wait for Wall Street’s sentiment to change, and it will change.  It always does. 

Eventually, investors will stop fixating on the negatives—declines in fixed line voice revenues and stiff competition among carriers—and will realize the utility value of the mobile and internet services. 

My recommendation this month is the S&P Global Telecommunications Sector Index Fund IXP.  This ETF is a collection of the world’s premier telecom companies.  It is a mixture of mature, utility-like holdings in AT&T, Verizon and Vodafone, and dynamic companies with direct exposure to the rising emerging market consumer in Telefónica, América Móvil and China Mobile.  It also pays a handsome 4.5% dividend yield, which is a lot more than you’ll get in the bond market these days.

The Trade:

Buy shares of IXP at market.  Plan to hold for a minimum of 12 months to give this contrarian play time to work out.  Collect the 4.5% dividend in the meantime.  I expect a total return of 30% or more from the recent lows below $49.

Stop loss: Sell if IXP falls below $45.