Mutual fund managers are buying telecommunications stocks, many of them for the first time in years, as the sector emerges as a bright spot in an otherwise lackluster market.
“These are stable companies, and that allows them to pay out high dividends and to sustain those dividends,” said Todd Rosenbluth, head of the telecom and utilities group at the equity research division of Standard & Poor's.
Although the S&P Telecom Select Index is lagging the S&P 500 year-to-date, the sector index is doing better than the larger index in the second quarter, though both are down slightly. Telecom hasn't outperformed the broader market in some time, Mr. Rosenbluth said.
Many telecom companies have struggled as they've tried to figure out how to make money in a wireless world. Many companies have seen their customers shut down their land telephone lines in favor of cheaper wireless phone services.
At the same time, the competition in the industry has been fierce, Mr. Rosenbluth said.
But “in the U.S., the onslaught of competition in the telecom space has slowed, and people have made a choice to stick with their phone or cable companies,” he said.
That trend, along with the introduction of iPads, the evolution of mobile phones and increasing global adoption rates of wireless data sharing, is causing the telecom sector to make a comeback, observers said.
'CONSUMER STAPLE'
“People should really look at telecom as a consumer staple,” said Cliff Remily, co-manager of the Thornburg Investment Income Builder Fund. “Even in a bad economy, if someone loses their job, they still need their phone to find another job.”
Over the past few months, Mr. Remily has increased his portfolio's stake in telecom to 20%, from 14%.
Another factor driving the growth in telecom is the global demand for data over wireless or online devices, he said.
“It was reasonable a year ago to assume that people — especially in emerging markets — would be content with just having voice on cell phones,” Mr. Remily said. “It turns out that even people in low-wage, low-gross-domestic-product-per-capita areas want data services.”
And many telecom companies are getting smarter about how they charge for their services, with a growing number offering tiered pricing.
Currently, most customers have access to limitless data, but now firms are establishing pricing for customers that want unlimited access to downloads at full speed, Mr. Remily said.
One company he owns that does this is Dutch telecom provider Royal KPN NV Ticker:(KPN.AS). Mr. Remily also holds Vodafone Group PLC Ticker:(VOD), which owns 45% of Verizon Wireless.
Overall, investors don't realize how important telecom is, which means that the sector offers great value, he said.
“If these were valued like consumer staples, the valuations would be over the roof,” Mr. Remily said.
Fund managers' bullishness on the sector is a recent phenomenon.
For instance, Brian Barish, president and director of research at Cambiar Investors, has stayed away from telecom stocks.
“It's a tough business to be in,” he said.
Telecom was the worst-performing sector represented in the MSCI World Index last year. In the United States, the sector, as measured by the S&P Telecommunications Service Index, returned 12.3%, compared with the S&P 500's 12.8%.
This year, Mr. Barish has bought a couple of telecom stocks for his portfolio, the Cambiar Aggressive Value Fund Ticker:(CAMAX).
“With iPads and, pretty soon, competitors to that coming to market, I think it's reasonable to assume that over the next three to six years, most adults in developed countries are going to own a tablet,” he said.
And while the telecom industry's growth has jumped, valuations are still low, Mr. Barish said.
This year alone, he has bought shares of Sprint Nextel Corp. Ticker:(S), Verizon Communications Ticker:(VZ) and SK Telecom Corp Ltd. Ticker:(SKM), a South Korean telecom provider.
Ron Muhlenkamp, manager of the Muhlenkamp Fund Ticker:(MUHLX), also has bought into telecom, perhaps for the first time, acquiring shares of AT&T Inc. Ticker:(T) over the past six to eight months.
“I can't re-member ever owning telecom,” he said.
Mr. Muhlenkamp is turning to the sector as a better-yielding alternative to bonds, he said.
“I like free cash flow, and that's what I see here,” he said.
Although telecom companies do provide strong dividends, there also are compelling examples of growth in the sector, Mr. Rosenbluth said.
For example, S&P's equity re-search team anticipates 20% revenue growth this year from American Tower Ticker:(AMT), a provider of wireless and broadcast towers.
“When I talk to managers and they reference a growth telecom story, it's always American Tower,” Mr. Rosenbluth said.
Similarly, S&P's equity research division anticipates 21% revenue growth from MetroPCS Wireless Inc. (PCS), a provider of prepaid wireless services, he said.
“We are seeing that some of the best opportunities in the space are non-dividend-producing stocks,” Mr. Rosenbluth said.
E-mail Jessica Toonkel at [email protected].
