It is one of the smallest sectors in the S&P 500, but this year telecommunications is a big loser. The Vanguard Telecommunication Services ETF (NYSEArca: VOX) and the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) are down an average of 9%. Only energy has performed more poorly this year than the telecom sector.
International telecom stocks and exchange traded funds represent an option for yield-starved investors that are also looking to reduce their exposure to rising U.S. Treasury yields. That theme can be accessed with the iShares Global Telecomm ETF (NYSEArca: IXP).
Some analysts are bullish on big-name telecom stocks, including AT&T and Verizon, even though those stocks have run up this year. Importantly, those stocks are not stretched on valuation. However, it is AT&T and Verizon that are hampering the likes of IYZ and VOX year-to-date. Those stocks combine for significant portions of the rosters in those ETFs. In the case of VOX, the Vanguard teleom ETF, AT&T and Verizon combine for 46% of the fund’s weight.
“For the most of the past five years, telecommunication [stocks]have been written off by sell-side [analysts]and investors, which isn’t surprising given the competitive industry structure and price wars,” wrote Thomas Lee, Fundstrat’s U.S. portfolio strategist in a note published late June. Crystal Kim of Barron’s reported on and posted the Fundstrat note. “A rash of equity analyst downgrades in the past year has pushed the mean rating to the lowest in a decade, leaving telecom stocks with the lowest mean rating, lowest price-to-earnings multiple (12X), highest dividend yield (5.1%).”
Like real estate and utilities, the telecommunications sector is viewed as a bond proxy and therefore is also seen as vulnerable to rising interest rates. Of those three sectors, only telecom is lower year-to-date and the group is being thumped by utilities.
“The group has also underperformed utilities by 2,200 basis point or 22 percentage points. Lee noted that the four times that has occurred in the last three decades, there was always reversion to the mean in the six months following. The strategist had many other points to back up his argument — uber bearish analysts, spectrum consolidation, telling technical signals,” according to Barron’s.
The good news is that AT&T and Verizon, the dominant telecommunications names and the biggest holdings in the sector’s ETFs are attractively valued, a trait that is increasingly hard to find among U.S. stocks in nearly any sector.
For more news and strategy on the Telecom market, visit our Telecom category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.