Four Emerging Telecom Stock Picks

by: Matthew D. McCall

There was a great cover story in this weekend's issue of Investor's Business Daily titled "Wireless Operators Tap Africa, Other New Markets For Growth". The article discusses how both large and small telecom companies are vying for entry into emerging markets such as Africa and Southeast Asia. I found some of the numbers to be very promising for investors looking to profit from the continued growth of mobile phones in the emerging markets. For example, the paper cites that only 18% of the population in India uses mobile phones. This is compared with percentages over 100% in Israel, Russia, and the UK. (The number can rise above 100% because some people have more than one mobile phone device.)

I have been a fan of the sector for years and believe there is much more upside for the telecom companies that focus on the emerging markets. Here are four stocks that offer investors exposure to the growth:

China Mobile (NYSE:CHL) – The clear leader of mobile phones in the one of the best growth stories of our time. CHL has the chart to back up the hype, gaining over 100% year-to-date. My first thought was that China must be flooded with mobile phones and the market is saturated. Yet the IBD article suggests the penetration rate in China is only 38%. After reading that number I believe there has to be more upside for this China play.

Millicom International Cellular (MICC) – Millicom currently has 20 million customers in 16 countries that cover 3 continents. What caught my eye on this company a few years ago was its exposure to Africa. Even now, there are not many investment options for the individual investor in regards to Africa. The company offer prepaid, mass distribution of their products and services in their countries. Because most of the subscribers come from a very low income, the charges are based on seconds instead of minutes. This is a strategy that has done well for MICC and gives them a small edge on the competition. The third quarter results showed year-over-year subscriber growth of 77%. Their largest number of subscribers come from the Central America region, followed by South America and Africa.

MTN Group (OTCPK:MTNOY) – MTN Group operates in 21 countries in Africa and the Middle East. I find MTN to the most direct play on Africa, which many believe is the next frontier in emerging markets. Major money is being spent by countries around the world to begin building infrastructure in Africa because they see the potential in years to come. As more foreign money makes its way to the continent it will create disposable income for such things as mobile phones. At the end of September MTN had 54 million subscribers, up 12% from June. The largest amount of subscribers are based in Nigeria (14.9 million), followed by South Africa (14.1 million). The growth has come from the Middle East and North Africa region. The number of subscribers in Iran grew by an amazing 88% and Afghanistan saw growth of 66%. The company is listed on the JSE in South Africa, but could be bought here in the US through the pink sheets.

Emerging Market Telecom Fund (ETF) – If one company does not suit your investment style, there is the option of a closed-end fund. ETF is made up of a basket of emerging market telecom stocks that are based in countries such as China, Russia, South Africa, Brazil, and India. China Mobile (CHL) made up nearly 19% as of 9/30 and the next largest holding was M-Cell (7%). The one caveat is that ETF has an above-average expense ratio when compared with a typical exchange-traded fund. That being said, the returns are worth the 1.56% annual expense ratio; ETF was up 53% for the year through 12/10.

Disclosure: Author's firm owns shares of ETF.