The telecom sector got a big shakeup recently, with AT&T (NYSE:T) announcing that it will buy T-Mobile in a deal that would boost AT&T's subscribership to almost 130 million - pushing it past Verizon (NYSE:VZ) as the largest wireless carrier in the U.S. The $39 billion deal is far from complete, however. It still has to make it through regulatory agencies - and, given the antitrust implications of a deal between two of the four-largest cellular service providers in the country, the deal is likely to face quite a bit of scrutiny.
The AT&T / T-Mobile deal shined a light on a sector that has languished in recent years. Since the March 2009 low, the S&P 500 is up about 95%; the SPDR S&P International Telecom Sector exchange-traded fund (NYSEARCA:IST), meanwhile, has made less than two-thirds of that gain, as investors have looked for flashier growth-oriented shares amid the market rebound.
That has resulted in some very attractive valuations in the sector. Earlier this year, I wrote about how AT&T was selling at an attractive valuation, and it's not alone. According to Morningstar, the SPDR S&P International Telecom ETF's 45 holdings were recently trading for an average of 11.6 times prospective earnings and 1.32 times book value, and were yielding 5.5% - all of which are far better than the market average.
Those numbers, and the AT&T / T-Mobile deal, got me wondering whether my Validea.com Guru Strategy models (each of which is based on the approach of a different investing great) have any interest in the sector. AT&T still gets high marks, earning approval from my Peter Lynch- and James O'Shaughnessy-based strategies. But a number of other telecom stocks - some right here in the U.S. and others overseas - also get approval. Here's a look at some of the best of the bunch:
Verizon Communications Inc. (VZ): Based in New York, Verizon has 94 million wireless customers across the U.S., and also offers broadband, television and landline services. It has a market cap of about $106 billion.
Verizon gets strong interest from my James O'Shaughnessy-based value strategy. When looking for value plays, O'Shaughnessy targeted large firms with strong cash flows and high dividend yields. Verizon is plenty big enough, and it has $10.15 in cash flow per share (eight times the market mean) and an impressive 5.2% dividend yield, all of which help it pass the O'Shaughnessy-based model.
One note of caution: After years of not having to pay dividends to Vodafone (NASDAQ:VOD), which owns 45% of Verizon Wireless, several reports have indicated that Verizon may have to start doing so in the next year or two, which could have a significant impact on Verizon's own dividend yield. Still, even if its yield were a full 2 percentage points lower than its current level, Verizon would pass my O'Shaughnessy-based model, so it's worth a look.
Millicom International Cellular SA (MICC): Based in Luxembourg, Millicom provides prepaid cellular telephone services to more than 30 million customers in 13 emerging markets in Latin America and Africa. It provides that service in areas where basic telephone service is often inadequate to handle increasing demand that has resulted from economic development and rising personal income levels.
Millicom ($10.6 billion market cap) gets strong interest from the model I base on the writings of hedge fund guru Joel Greenblatt. In his Little Book that Beats the Market, Greenblatt detailed a remarkably simple - and remarkably successful - strategy that included just two variables: earnings yield and return on capital. With a 17.7% earnings yield and a return on capital near 70%, MICC is the 18th-highest-rated stock in the market right now, according to my Greenblatt-inspired approach.
Deutsche Telekom AG (OTCQX:DTEGY): This Germany-based global telecom giant ($68 billion market cap) is T-Mobile's parent. While the impact of the T-Mobile sale remains to be seen, for now my O'Shaughnessy-based model is a fan of DT's stock. It likes the company's size (more than $89 billion in trailing 12-month sales), solid cash flow ($4.53 per share), and stellar 6.1% dividend yield.
China Mobile Ltd. (NYSE:CHL): Hong Kong-based China Mobile is China's largest mobile phone network, with over 500 million subscribers. The firm has a market cap around $191 billion.
The model I base on the writings of mutual fund legend Peter Lynch likes China Mobile. Lynch famously used the P/E/Growth ratio (which divides a stock's price/earnings ratio by its earnings per share growth rate) to find good stocks selling on the cheap, and the model I base on his writings likes P/E/Gs below 1.0. When we divide China Mobile's 10.8 P/E by its 19.9% long-term EPS growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate), we get a P/E/G of just 0.53, a sign that the stock is a bargain. Lynch also liked conservatively financed companies, and China Mobile's 1.86% debt/equity ratio is plenty low enough to pass its test.
China Mobile's size is one reason my O'Shaughnessy-based value model also likes the stock. It also likes the firm's $7.69 in cash flow per share and solid 4.1% dividend yield.
MetroPCS Communications, Inc. (PCS): This Texas-based upstart offers wireless service on a no-long-term contract, flat rate, unlimited usage basis in the U.S. It has been picking up subscribers fairly quickly since it launched its services nine years ago, and now has more than 8 million of them.
MetroPCS ($5.9 billion market cap) gets approval from my O'Shaughnessy-based growth model. This approach looks for stocks that have upped EPS in each year of the past half-decade, which MetroPCS has done. It also targets stocks with a key combination of qualities: a high relative strength, which is a sign that the market is embracing the stock, and a low price/sales ratio, a sign that it hasn't gotten too pricey. MetroPCS's relative strength is an excellent 95, and its 1.44 P/S ratio comes in under the O'Shaughnessy-based model's 1.5 upper limit, so it makes the grade.
Disclosure: I am long T, MICC, CHL.