Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Dialing Up Telecom Riches
06/27/2007 12:00 am EST
Tim Middleton, contributor to MSN Money, says telecommunications stocks are on fire and he finds one fund that has been particularly hot.
Technology has fizzled since the Internet bubble burst, but its cousin, telecommunications, is doing fine.
There are plenty of ways to [play it], from individual stocks to mutual funds to exchange-traded funds. The best route I've found is the T. Rowe Price Media & Telecommunications Fund (PRMTX), which has gained 15.9% this year, as of June 13, and an average of 27.7% over the past five years.
Amid anxiety and uncertainty in most world stock markets, communications has a solid future. "Shareholders are getting the benefit now" of huge investments made over the past 15 years in infrastructure, says Henry Ellenbogen, portfolio manager of the T. Rowe Price fund. "There's a lot of innovation and a tremendous opportunity for strong companies."
Ellenbogen is following five interlocking themes he expects to continue to buoy the media and telecoms group: emerging-markets wireless, the Internet, what he calls "all you can eat" wireless operators in the United States, domestic wireless data towers and the global billboard industry.
Telecommunications, rather than media, dominates his portfolio. That sector imploded in the bear market that began in 2000, tumbling 30% or more three years in a row. Since then, however, the group has raced to the front, leading most sectors for the past five years and all of them over the most recent 12 months. The average fund is up 39.3% in the past year, and the Price fund has soared 49.4%.
Ellenbogen is willing to make heavy bets on individual stocks. He has 47% of the fund's $1.97 billion of assets in the 10 largest positions. The top holdings are Amazon.com (NASDAQ: AMZN), America Movil (NYSE: AMX), American Tower (NYSE: AMT) and Crown Castle International (NYSE: CCI).
Europe and Asia are years ahead of the United States in wireless. In developing countries, "wireless is not a replacement for fixed lines—it’s the only game in town," Ellenbogen notes.
"In the interactive space, our largest holdings are Amazon and Google (NASDAQ: GOOG),” Ellenbogen says. "What we look for are Internet companies that are very innovative and invest heavily in research and development. They can grow faster than end markets with a strong financial model, and both of them have done that, not only in the United States but internationally."
Traditional media stocks accounted for about 40% of assets at the end of April, when the funds' most recent report was issued.
In the past three years, the typical fund has trailed the Dow Jones US Telecommunications Index by about 2.5 percentage points. The Price fund has beaten it by more than five points.
Price Media & Telecommunications also benefits from a thrifty expense ratio of 0.87%. The average telecom fund charges 1.62%, according to Morningstar.
Index investors can buy the index, however, in the form of iShares Dow Jones US Telecom Index Fund (AMEX: IYZ) and benefit from an expense ratio of only 0.48%. That fund is up 15.1% this year and 41.4% in the past 12 months.