Telecom Sector Stocks: Underperforming But Ready To Deliver

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Includes: AAPL, CTL, GOOG, T, TMUS, VZ
by: Richard Saintvilus

In part one of this series, we came up with several technology stocks that I have deemed worthy of selling in anticipation of a market pullback. We have established that their gains were due (in part) to the market's "rising tides." For similar reasons, in part 2 we identified five financial stocks that may see a near term pullback and then it was followed by a look at healthcare, then consumer staples, energy, and more recently utilities.

In this piece, we are going to look at stocks within telecomunications and see which firms may suffer a near term pullback.

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Clearly the year to date sector performance above shows that investors are not only excited about what lies ahead in 2012, but have become decisive about what industries matter the most. So again, with such early gains and with the broader indices having approached record territories, should investors be in a fearful mode and begin to lock in some profits as the bear market may just be around the corner? This question is not that difficult to answer if one has studied recent history.

Trading the Sector Gains

They say "a rising tide lifts all boats." There is unquestionable truth in this theory especially in the stock market as evident by this bullish run we are now seeing. So when it comes to stocks, we need to understand that a strong economy can propel even the most challenged business models.

In this article, which is the seventh in the series of looking within each sector, we are going to try to identify certain communications stocks that might be on the verge of a pullback and ways to possibly mitigate some risk and exposure to losses. The benefit of this is that if you are on the sidelines, hopefully you will be able to get an idea of a possible good entry point.

Trading Communications

The telecom sector has regained some of its sex appeal ever since technology giant Apple (NASDAQ:AAPL) came out with the original iPhone almost five years ago. Before then it was just a series of M&A events that fell short of inspiring the market that it could grow - and this was before the sector was deep in scandal involving WorldCom. Since then it has seen resurgence over the past several years due to the aforementioned Apple, but also due to the significant increase in the popularity of smart phones.

The success of Apple's iPhone partnership for both Verizon (NYSE:VZ) as well as AT&T (NYSE:T) can't be overstated. For AT&T in particular, although its logo has always been the globe, I think it is also fair to say that Apple has put the company on the map. However, perhaps one of the best reasons to own either company is for their strong dividend yields which currently are 5.3% and 5.8%, respectively.

These two telecom giants (although down on the year) have been considered safe havens of sorts because the dividends get bigger as the stock falls. Among the telecoms, only CenturyLink (NYSE:CTL) offers a better dividend at a 7.8% yield and is another company within the sector that is worthy of consideration. CenturyLink has spent more than $38 billion in less than three years on acquisitions and has used those buys well. Sales at the firm more than doubled to $4.6 billion last quarter and CenturyLink is on target to reach 62 cents a share profit this quarter.

By and large, telecom is very interesting and it is extremely challenging not to like its prospects - especially now since it is underperforming. Not only is the sector filled with attractive growth prospects everywhere, but they are also extremely safe by virtue of their attractive dividend pays. However, where some of the firms may fall short on the yield, most make up for it in other growth-driving areas by featuring 3 and 4G networks, as well as a wide selection of wireless products highlighted (as mentioned) by Apple's iPhone as well as devices for Google's (NASDAQ:GOOG) Android platform.

Other smaller considerations include smaller names such as MetroPCS Communications (PCS) - a company that I think will be a great acquisition candidate at some point during the year for the same reasons that AT&T went after T-Mobile last year - albeit unsuccessfully.

Summary

Thank you for reading the energy sector stocks in part five of this series. In the next piece we will investigate the transportation sector and see which stocks might be on the verge of a pullback.

Disclosure: I am long T, VZ.