Best And Worst Q4'15: Telecom Services ETFs, Mutual Funds And Key Holdings

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Includes: FTUTX, FWRLX, IXP, LTL, TEF, VZ
by: David Trainer

Summary

The Telecom Services sector ranks eighth in Q4'15.

Based on an aggregation of ratings of 7 ETFs and 13 mutual funds.

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

The Telecom Services sector ranks eighth out of the 10 sectors as detailed in our Q4'15 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Telecom Services sector ranked seventh. It gets our Neutral rating, which is based on an aggregation of ratings of seven ETFs and 13 mutual funds in the Telecom Services sector as of October 8, 2015. See a recap of our Q3'15 Sector Ratings here.

Figures 1 and 2 rank all six ETFs and all 8 mutual funds in the sector that meet our liquidity standards. Not all Telecom Services sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 54). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Telecom Services sector should buy the Attractive rated mutual fund from Figure 2.

Figure 1: ETFs with the Best & Worst Ratings

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

Sources: New Constructs, LLC and company filings

The State Street SPDR S&P Telecom ETF (NYSEARCA:XTL) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings

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

Sources: New Constructs, LLC and company filings

5 mutual funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums.

The iShares S&P Global Telecommunications Index Fund ETF (NYSEARCA:IXP) is the top-rated Telecom Services ETF and the Fidelity Wireless Portfolio (MUTF:FWRLX) is the top-rated Telecom Services mutual fund. IXP earns a Neutral rating and FWRLX earns an Attractive rating.

The ProShares Ultra Telecommunications ETF (NYSEARCA:LTL) is the worst-rated the Telecom Services ETF and Fidelity Advisor Telecommunications Fund (MUTF:FTUTX) 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 54 stocks.

Verizon Communications (NYSE:VZ) is one of our favorite stocks held by Telecom Services ETFs and mutual funds and earns our Attractive rating. Over the past decade, Verizon has grown after-tax profits (NOPAT) by 5% compounded annually. Beyond growing profits, Verizon has also improved its return on invested capital (ROIC) during the same period from 5% to 8%. The market has failed to realize the strength of Verizon's business and its potential for profit growth. We think the shares are greatly undervalued. At its current price, Verizon has a price to economic book value (PEBV) ratio of 0.8. This ratio implies that the market expects Verizon's profit to permanently decline by 20%, which seems highly unlikely considering the telecom giant's strong history of increasing profitability. Even if Verizon is able to grow NOPAT by only 3% compounded annually for the next decade, the stock is worth $72/share - a 53% upside.

Telefonica (NYSE:TEF) is one of our least favorite stocks held by Telecom Services ETFs and mutual funds and earns our Dangerous rating. Since 2012, Telefonica's NOPAT has declined by 19% compounded annually while ROIC has fallen from 7% to a bottom quintile 5%. While Verizon has been able to maintain profitability in the sector, Telefonica has not. However, shares are valued as if the company is poised for rapid profit growth. To justify the current price of $13/share, Telefonica must grow NOPAT by 5% compounded annually for the next 11 years. This expectation ignores the history of Telefonica's business over the past few years. Those interested in the Telecom Services sector would be wise to avoid TEF especially when there are better alternatives like VZ.

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

Sources: New Constructs, LLC and company filings

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

Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Thaxston McKee 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.

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