Inside The Compelling Communication Services Sector

Among sector exchange traded funds, the Communication Services Select Sector SPDR Fund (XLC) is one of the more impressive offering this year with a year-to-date gain of more than 22%. Some analysts see continued opportunity in the sector.

The communications services sector overall is still a relatively new offering that was formed in late 2018, when 26 companies from the telecommunication services, consumer discretionary and information technology sectors were shuffled to a new Communications Services sector, creating GICS Code 50 – a combination of old media and new media.

“The sector consists of four major types of companies: traditional phone companies, cable companies, wireless carriers, and infrastructure firms,” said Morningstar in a recent note. “Traditional phone companies AT&T and Verizon dominate the index. Verizon shares have stagnated this year after a fantastic run in 2018, while AT&T has roughly kept pace with the market, bouncing back from a rough sell-off after the Time Warner merger. We believe AT&T shares have more room to run.”

Dialing Into XLC

Google parent Alphabet Inc. (NASDAQ: GOOG) and Facebook Inc. (NASDAQ: FB) are XLC’s two largest stocks and combine for over 40% of the fund’s weight. However, there is more to the fund and the communication services sector in general.

“Cable companies have continued to steal share in the Internet access market thanks to their superior network capabilities, offsetting fears of cord-cutting in the television business,” notes Morningstar. “Comcast has rebounded sharply from its own 2018 merger challenges, while more highly indebted firms like Charter and Altice USA have jumped 40% or more so far in 2019. Unfortunately for new investors, we believe cable stocks, in general, are fairly valued or worse, despite our expectation that these firms will continue to perform well.”

For investors considering XLC over the near-term, the fund’s defensive components, such as AT&T and Verizon hold some appeal.

“We believe that AT&T’s wireless and media businesses remain well positioned competitively and will produce stable cash flow for years to come, enabling the firm to quickly repay debt. At current prices, AT&T shares offer a generous 6.3% dividend yield,” according to Morningstar.

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