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These are the 2 best undervalued plays in the Telecomm sector right now

These are the 2 best undervalued plays in the Telecomm sector right now

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If you’re the kind of person that tends to shy away from what’s hot, trendy or buzz-worthy today, whose preferences and opinions tend to go against the grain of popular norms, then as an investor you probably gravitate naturally to strategies like value investing. That contrarian mindset means that where most investors will look at a stock that is trading at yearly lows and immediately dismiss it, you’ll think of it as a potential opportunity. Contrarian investors like to take an extra look at depressed stocks and measure them based on their fundamentals, because those are the situations that tend to yield the best bargains no matter what is going on in the broad market.

The telecommunications sector is an area of the market that most investors have been dumping since the beginning of 2017. Over that time period, the industry as measured by the iShares Telecommunications ETF (IYZ) is down more than 22%. Some of the stocks in the industry have bucked that trend; Vonage Holdings Corp (VG) and T-Mobile U.S. (TMUS) are two examples, with VG trading near to its all-time highs right now, and TMUS only about 3.2% off of its price from a year ago; but each come with its own set of risks. VG is extremely overvalued, and TMUS is trying to merge with Sprint Corp (S), a move that would leave just three major wireless carriers in the United States. Both Sprint and T-Mobile cite the merger as necessary for them to remain competitive, but the deal appears to be running into major regulatory concerns. At the beginning of the month, the Committee on Foreign Investment in the United States cited ties that Softbank, the primary shareholder of Sprint has to Chinese telecomm company Huawei Technologies Co. as a threat to American security, and that could prompt the Trump administration to block the merger. That casts a long shadow on the wisdom of a play in either T-Mobile or Sprint right now.



The interesting thing about the telecommunications sector right now is that the best opportunities can be round with the two biggest players. It might be surprising to see VZ and T trading at significant discounts right now, but the truth is that both stocks have a compelling case to make. Perhaps one of the biggest points to consider in terms of evaluating future opportunity lies in the Internet-of-Things (IoT). This remains one of the areas of the technology world with the greatest long-term opportunity, and the companies that are building out the 5G infrastructure it will rely on will reap big profits in the long run. AT&T and Verizon, not surprisingly are at the front of the pack at getting their respective 5G services online.

AT&T Inc. (T)

Current Price: $31.71

AT&T Inc. (T) is a holding company that provides communications and digital entertainment services in the United States and the world. The Company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The Company offers its services and products to consumers in the United States, Mexico and Latin America and to businesses and other providers of telecommunications services worldwide. It also owns and operates three regional TV sports networks, and retains non-controlling interests in another regional sports network and a network dedicated to game-related programming, as well as Internet interactive game playing. Its services and products include wireless communications, data/broadband and Internet services, digital video services, local and long-distance telephone services, telecommunications equipment, managed networking, and wholesale services. Its subsidiaries include AT&T Mobility and SKY Brasil Servicos Ltda. T’s current market cap is $195.2 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 15% while revenues were mostly flat, posting a decline of about 3%. The slight decline in revenue is pretty consistent with the industry trend, and industry experts in general expect that pattern to continue through 2018, with flat revenues in 2019. That puts a premium on companies that can manage costs effectively. T fits that description nicely, with Net Income for the past quarter a healthy 12% of Revenues. For the year, that measurement increases a little over 19%.
  • Free Cash Flow: T’s free cash flow is very healthy, at more than $18 billion. While this number declined modestly in the last quarter, for the year it increased by a little more than $1 billion.
  • Debt to Equity: T has a debt/equity ratio of .91, which by most measurements is manageable. The company’s long-term debt has almost doubled since early 2015, but their balance sheet indicates that operating profits are more than adequate to service their debt, with healthy cash and liquid assets (more than $48 billion posted in the last quarterly report) to provide additional flexibility and liquidity.
  • Dividend: T pays an annual dividend of $2.00 per year, which at its current price translates to an annual yield of about 6.29%. This is well above the industry average as well as the S&P 500 average of 2.0%; more compelling is that despite the high yield, their payout ratio is just a little over 50% of their past year’s earnings.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $23.69 and translates to a Price/Book ratio of 1.32 while the industry average is 1.8. More interesting is the fact that their 5-year historical average Price/Book ratio is 1.94. A rally to par with its historical average would put the stock at about $46.50. That offers a long-term upside of 46% over the stock’s current price.



Verizon Communications Inc. (VZ)

Current Price: $51.14

Verizon Communications Inc. (VZ) is a holding company. The Company, through its subsidiaries, provides communications, information and entertainment products and services to consumers, businesses and governmental agencies. Its segments include Wireless and Wireline. The Wireless segment offers communications products and services, including wireless voice and data services and equipment sales, to consumer, business and government customers across the United States. The Wireline segment offers voice, data and video communications products and services, such as broadband video, data center and cloud services, security and managed network services, and local and long distance voice services. The Company has combined Yahoo! Inc.’s operating assets with its existing AOL Inc. business to create a new subsidiary, Oath Inc., owns a diverse house of more than 50 media and technology brands. The Oath portfolio includes HuffPost, Yahoo Sports, AOL.com, MAKERS, Tumblr, Yahoo Finance and Yahoo Mail. VZ’s market cap is $211.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 23% while revenues grew 6.57%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable over the long term; however it is also a positive mark of management’s ability to maximize its business operations. VZ also boasts healthy profit margins, with Net Income for the past year that is more than 24% of Revenue.
  • Free Cash Flow: VZ’s free cash flow is very strong, at more than $1.5 billion. This number has also increased in each quarter of the past year from nearly 0 in the first quarter of 2017.
  • Debt to Equity: VZ has a debt/equity ratio of 2.15, which is relatively high but not unusual for the Diversified Telecommunication Services industry. The company’s balance sheet indicates that operating profits are more than sufficient to service the debt they have.
  • Dividend: VZ pays an annual dividend of $2.36 per year, which at its current price translates to an annual yield of 4.67%. This is well above the industry average as well as the S&P 500 average of 2.0%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for VZ is $12.68 and translates to a Price/Book ratio of 4.03. That is normally higher than I like to see, but when you compare that number to the stock’s historical average, which is about 9.76, you get a better idea of the way the market treats this stock. On that basis, the stock is even more undervalued than T is, since the stock would have to increase to more than $123 to reach par with its average. That may be over-optimistic given that the stock has never reached those levels in the past; but it does suggest that there is plenty of reason for terrific upside in the long run.


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