Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Ring Up Ma Bell
03/25/2005 12:00 am EST
"For five long years, the telecommunications sector has been mired in depression," says Roger Conrad, editor of the Utility Forecaster. With his expectation for the sector to improve, he suggests a fund offering investors an easy way to play the former parts of Ma Bell.
"Too many competitors, extreme overcapacity, a mountain of debt, and quixotic regulation undermined even the strongest players in recent years. Most of the rest have evaporated altogether. Here in early 2005, however, telecom has at last begun to turn up. The catalyst: compelled by the courts, the Federal Communications Commission stopped forcing its 'vision' and instead is allowing the industry to evolve. The result: rather than fight to the death, companies are merging for better margins. Debt is down, and rising demand for wireless and broadband has soaked up much of the overcapacity.
"We’ve yet to see a genuine acceleration in profits or a sustained recovery in share prices. But as industry conditions improve, both are inevitable. And telecommunication stocks—the only utility group that didn’t rally steeply in the past two years—are still cheap. Rising margins in both wireless and wireline businesses mean higher sales, margins, profits, dividends and, ultimately, share prices for communications companies. And though the best have been in a gradual uptrend since last year, they’re nowhere close to being overvalued.
"In 1983, on the eve of Judge Harold Greene’s breakup of the Bell System, a consortium of major Wall Street houses launched a unit trust, AT&T Equity Income Fund (ATF ASE) to hold Ma Bell’s former parts. Two decades later, those pieces continue to dominate American communications. In fact, when Verizon completes its acquisition of MCI, the AT&T Equity Fund unit holders will own a piece of every major telecom (except Sprint/Nextel). Meanwhile, the fund provides investors with a yield of 3.8%. With no fees and a big yield, it’s the best telecom mutual fund around. Buy AT&T Equity Income Fund up to 85.