Best And Worst Q1'16: Telecom Services ETFs, Mutual Funds And Key Holdings

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Includes: CHL, FWRLX, IGN, IYZ, RYTLX, TDS
by: David Trainer

Summary

The Telecom Services sector ranks eighth in Q1'16.

Bases on an aggregation of ratings of six ETFs and 13 mutual funds.

IGN is our top-rated Telecom Services ETF and FWRLX is our top-rated Telecom Services mutual fund.

The Telecom Services sector ranks eighth out of the ten sectors as detailed in our Q1'16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Telecom Services sector ranked eighth as well. It gets our Dangerous rating, which is based on aggregation of ratings of six ETFs and 13 mutual funds in the Telecom Services sector. See a recap of our Q4'15 Sector Ratings here.

Figure 1 ranks from best to worst all six Telecom Services ETFs and Figure 2 shows the five best and worst-rated Telecom Services mutual funds. Not all Telecom Services sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 56). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Telecom Services sector should buy one of the Attractive-or-better rated ETFs from Figure 1.

Figure 1: ETFs with the Best & Worst Ratings - Top 5

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* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Figure 2: Mutual Funds with the Best & Worst Ratings - Top 5

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* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

The Rydex Telecommunications Fund (MUTF:RYMIX) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums.

The iShares North American Tech-Multimedia Networking ETF (NYSEARCA:IGN) is the top-rated Telecom Services ETF and the Fidelity Wireless Portfolio (MUTF:FWRLX) is the top-rated Telecom Services mutual fund. IGN earns an Attractive rating and FWRLX earns a Neutral rating.

The iShares U.S. Telecommunications ETF (NYSEARCA:IYZ) is the worst-rated Telecom Services ETF and the Rydex Telecommunications Fund (MUTF:RYTLX) is the worst-rated Telecom Services mutual fund. Both earn a Very Dangerous rating.

45 stocks of the 3000+ we cover are classified as Telecom Services stocks, but due to style drift, Telecom Services ETFs and mutual funds hold 56 stocks.

China Mobile Limited (NYSE:CHL) is one of our favorite stocks held by Telecom Services ETFs and mutual funds and earns a Very Attractive rating. Since 2012, China Mobile has generated positive economic earnings, maintained a top quintile return on invested capital (ROIC) of 20% or higher, and generated a cumulative $22.9 billion in free cash flow. However, CHL remains significantly undervalued. At its current price of $54/share China Mobile has a price to economic book value (PEBV) ratio of 0.6. This ratio implies that the market expects China Mobile's profits to permanently decline by 40% from current levels. If China Mobile can grow profits by just 10% compounded annually for the next five years, the stock is worth $123/share - a 127% upside.

Telephone & Data Systems (NYSE:TDS) is one of our least favorite stocks held by FTUAX and earns a Dangerous rating. Since 2009, Telephone & Data systems after-tax profit (NOPAT) has declined by 21% compounded annually. At the same time, its ROIC has fallen from 5% to a bottom quintile 1%. Shares of Telephone & Data remains significantly overvalued given the clear deterioration of its business operations. To justify its current price of $23/share, TDS must immediately achieve pre-tax margins of 3% (0% in 2014) and grow revenue by 10% compounded annually for the next 16 years.

Figures 3 and 4 show the rating landscape of all Telecom Services ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

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Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

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Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.