Recent data shows that the overall US equity market value has climbed to $34 trillion from a $14 trillion trough in 2009. Similarly households have increased corporate equity holdings to nearly $14 trillion from a $5 trillion trough in 2009. (Source Federal Reserve) While the fundamental economy as measured by GDP or other metrics has not fared as well.
With many macro indicators pointing to a frothy market, finding compelling value in the midst of this multi-year bull run is challenging for any investor. One method to finding value is drilling into the individual sectors looking at their relative and historic earnings multiples. After scanning the sectors in the S&P 500 (NYSEARCA:SPY) Telecom presents the most attractive opportunities. Telecom is trading at 12.7 times forward earnings, slugging it out with financials for the lowest multiple. The current level is the lowest for Telecom since 2009 and well below historical norms. (I highly recommend Edward Yardeni's site to investors that offers substantial data on the many economic and valuation statistics www.yardeni.com/retail/defaultprem.aspx#smf)
Our two top picks in the sector are Century Link (NYSE:CTL) and AT&T. (NYSE:T) Both offer substantial dividend yields with CTL hovering close to 7%. In addition both companies are buying back stock resulting in a substantial overall return of capital to shareholders.
At the same time valuations are dirt cheap. Both CTL and T are trading at attractive historically attractive valuations on both a price to earnings and EV to EBITDA basis. Both have earnings multiples around 12x earnings and EV ratios of 5 times EBITDA.
While growth is a concern with the sector reporting negative revenue overall in the final quarter of 2013, CTL reported earnings that exceeded estimates substantially. Management reaffirmed its commitment to the lofty dividend and indicated new investments should begin trim revenue losses in the foreseeable future.
Stabilizing revenue should pose a positive catalyst for the sector to outperform and we expect multiples will begin to expand. Investors should target a modest more modest discount to the S&P 500. We are targeting a sector multiple of 14.5 indicating a 20% discount to the forward PE. With hefty dividends investors stand to take a more than 25% returns should the target multiple be realized.
To take advantage Investors should consider rotating allocations into the Telecom sector through direct purchases of large capitalization names CTL and T
For those seeking more diversification several quality ETFs are available. Vanguard Telecom ETF (NYSEARCA:VOX) offers exposure to these names in its top ten holdings with a minimal management fee of just 10 basis points. In addition the Dow Jones Telecommunications ETF (NYSEARCA:IYZ) or the S&P Telecommunications ETF (NYSEARCA:IXP) are two great index options available.
CTL Valuation from Yahoo Finance
AT&T Valuation from Yahoo Finance
|Market Cap (intraday)5:||169.80B|
|Enterprise Value (Mar 18, 2014)3:||241.04B|
|Trailing P/E (ttm, intraday):||9.62|
|Forward P/E (fye Dec 31, 2015)1:||11.73|
|PEG Ratio (5 yr expected)1:||2.00|
|Enterprise Value/Revenue 3:||1.87|
|Enterprise Value/EBITDA 6:||5.16|
Disclosure: I am long T, CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.