InvestingHaven’s research team is on record calling a bottom in the telco sector. Which telco stocks are bottoming in 2018, which ones are worth considering to buy?
Thanks to modern telecommunication infrastructure, we can connect to anyone anytime any place. However, from an economic perspective, the telco sector is a cut-throat business with a lot of competitors, a true red ocean. Moreover, in an environment with rising interest rates the profit margin of telco business will be hurt. InvestingHaven’s team has been monitoring the telco sector for last three months, and we highly suspect this sector in the process of making a serious dip.
In this review, we will take a look at two ETFs namely: VOX and IYZ.
Vanguard Telecommunications Services ETF – VOX, offers low cost, broad-based exposure to the telecom industry, making it an option for investors looking to overweight a corner of the U.S. market that can often deliver attractive dividend yields. There are, however, some potential drawbacks: a handful of mega cap companies account for a huge portion of total assets, diminishing some of the diversification benefits that may be more apparent in a fund like XTL. VOX can be a handy tool for investors implementing a sector rotation strategy or establish a value tilt, but be aware of the huge concentration in a small number of stocks
Monthly chart of VOX
The monthly chart of VOX above shows that the 2007 top of ~84.7 holds for 6 years before a breakout in Oct 2013, which turns out to be a fake one. It took another 2.5 years of chopping range of 77-89 before a convincing breakout in March 2016. That didn’t bode well! 2 years of struggles in prices came to settle at 2007 top, which is former resistance and currently support. If this support holds then our bullish stance on telco will be materialized.
Next, the iShares U.S. Telecommunications ETF – IYZ focuses on exposure to the U.S. telecom market, making it for a good option for investors to implement a sector rotation strategy or focusing on corners of the domestic stock market that generally offer attractive dividend yields.
Monthly chart of IYZ
IYZ chart has more historical data dated back to the 2000 dotcom bubble collapse. The 34.25 zone is its Achilles heel as it has been resistance already twice: during the 2007 global financial crisis as well as in Jan 2017. It made a sharp retracement that took 15 months to settle in at the crucial blue zone which happens to be channel support. Hence, we have 2 conditions which have to be respected before we can become bullish: IYZ will have to bounce up and break the orange secular resistance area. If this instrument breaks below support, either VOX or IYZ, the will be a divergence, and the bullish outlook will be invalidated.
As such, we will have a deeper look on the following telco stocks: Sprint Corporation, Vodafone Group, CenturyLink, Verizon Communication.
Telco stock #1 – Sprint Corporation (NYSE: S)
Sprint Corporation (Sprint) – a holding company along with its subsidiaries, is a communications company offering a range of wireless and wireline communications products and services that are designed to meet the needs of consumers, businesses, government subscribers and resellers. It operates through two segments: Wireless and Wireline. The Company offers wireless and wireline services to subscribers in approximately 50 states, Puerto Rico, and the United States Virgin Islands under the Sprint corporate brand, which includes its retail brands of Sprint, Boost Mobile, Virgin Mobile and Assurance Wireless on its wireless networks utilizing various technologies, including third generation (3G) code division multiple access (CDMA), fourth generation (4G) services utilizing Long Term Evolution (LTE).
Monthly chart of S
Although the April candle is not completed yet, overall price of Sprint Corporation can be seen as a big range between 2.1 to 11.2. The price zone of 4.8 – 5.20 always seems to be the mean reversion so far. If this stock is indeed showing sign of bottoming and reversal up, we expect price to break 6.6 for next 1-2 quarter. A failure to support below 4.7 will make our outlook bearish.
Telco stock #2 – Vodafone Group PLC (Nasdaq: VOD)
Vodafone is a British multinational telecommunications company, with headquarters in London. It predominantly operates services in the regions of Asia, Africa, Europe, and Oceania. Among mobile operator groups globally, Vodafone is ranked fifth by revenue and second (behind China Mobile) in the number of connections (469.7 million) as of 2016. Vodafone owns and operates networks in 26 countries and has partner networks in over 50 additional countries. It has a secondary listing in Nasdaq.
Monthly chart of Vodafone
The chart of Vodafone dated back to 1988 when it was trading just below 3 dollar. Price went parabolic starting June 1997 and peaked at the 2000 dotcom bubble. Ever since it collapsed to a low of 14.4 in Aug 2002, price has been moving in a pseudo triangle pattern.
40.6 is so far the major resistance for the past two times. Price seems to be hanging on the long term uptrend line support. If the telco sector will be bullish we should be able to see prices making an third attempt to challenge 42 again by end of 2018 or mid 2019. A convincing break below 27 would make our bullish outlook.
Telco stock #3 – CenturyLink., Inc (NYSE: CTL)
CenturyLink, Inc. is an American telecommunications company, headquartered in Monroe, Louisiana, that provides communications and data services to residential, business, governmental, and wholesale customers in 37 states. A component of the S&P 500 index, the company operates as a local exchange carrier and Internet access provider in U.S. markets and is the third-largest telecommunications company in the United States in terms of lines served, behind AT&T and Verizon. It also provides long distance service.
Monthly line chart of CTL
The explosive and outstanding move since 1974 has seen price of penny stock CTL from 0.44 to rise relentlessly into the top of 44 at the 2000 dotcom top. Since then price has been trapped in a sideway range, only to move down towards a small support zone at 13-15. If this is really the important reversal zone, we should expect prices to rise 23 by the end of 2018. If a break below 13 which acts as channel support takes place it will immediately negate our bullish outlook.
Telco stock #4 – Verizon Communication inc (NYSE: VZ)
Verizon Communications Inc., incorporated on October 7, 1983, is a holding company that 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 and data, corporate networking solutions, data center and cloud services, security and managed network services, and local and long distance voice services.
Monthly line chart of Verizon
Verizon started trading at around 7.50 since its inception. It made a stellar move and peaked in 1999 at the price of ~63, since then this level has never been challenged. The dotcom bubble collapse saw the price of Verizon plummet 60% to 25.3 in Aug 2002. Price hit its previous neckline zone of 40-44 at the height of 2008 global financial crisis, and got rejected only to fall back to 26. It took Verizon’s stock price 2.5 years to break 45. Subsequently, price wasn’t doing much; it rather fluctuated sideways for a good 5.5 years and settled near intermediate blue trendline. Verizon carries the highest weightage in VOX as well as IYZ.
If the telco sector really bottoms, and is about to start moving upwards then Verizon will be a good gauge. We anticipate prices to re-challenge 63 at a minimum before mid 2019. However, should prices break below 43.5, it would result in an even longer consolidation period.
Telco stocks are not high beta growth stocks that will see prices double or triple in a short period of time. They are defensive stocks that give consistent dividend during periods of volatility and economic downturn.
Investors are strongly encouraged to do your own due diligence in case you would like to invest in telco industry as this review is only educational.