Time to Buy Telecom Stocks

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 |  Includes: ARRS, CNSL, CTL, EMKR, EQ, EQIX, IYZ, LVLT, NTGR, OA, OTEL, SHEN, TLAB, TMUS, TWTC
by: Joe Kunkle

The Telecom ETF (NYSEARCA:IYZ) is looking very strong here, and is nearing a major technical breakout of the upper trend-line resistance of a lower highs pattern, with MACD climbing.

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The Telecom Industry Association (TIA) has submitted proposals to Congress for a broadband stimulus, and I expect spending to pick up in this sector. Although the telecom market is mostly thought of as mature, new technologies such as WIMAX and CDMA enable companies to find new revenues sources and growth options.

I like to scan ETFs with strong patterns and then check the underlying components for some solid stock plays. In this ETF, CenturyTel (NYSE:CTL), Embarq (EQ), Metropcs (PCS), and Qwest (NYSE:Q) all look strong. Other telecom stocks not included in the top holdings of the ETF that look strong are BCE (forgotten stock), CNSL, EQIX, OTT, SHEN, and TWTC. Shenandoah Telecom (NASDAQ:SHEN) is hitting new highs and has arguably the best financial situation in the group.

My favorite here would be CenturyTel (CTL), above $29, trading at only 8.75x forward earnings, 0.9x book value (very cheap for industry) and yielding a 10.10% dividend. If shares push through $29, there is not much resistance until $35, a 20% move.

Fiber optic and WiMax equipment suppliers should also start to turn around, with stocks such as Arris (NASDAQ:ARRS), NetGear (NASDAQ:NTGR), Orbital Sciences (ORB), and Tellabs (NASDAQ:TLAB) providing interesting investment opportunities. The speculative player may want to take a look at Level 3 Comm. (NYSE:LVLT), which just announced expected margin improvements in 2009, and also Emcore (NASDAQ:EMKR).

Disclosure: no positions