Investors who bought into the telecommunications explosion are smiling: The sector continues to provide volatile yet superior stock results.
Wireless technology continues to envelop the world, as consumers in mature and developing markets alike are becoming hooked on mobile data and entertainment at their fingertips.
The pending $27 billion buyout of Alltel Corp. by TPG Capital and Goldman Sachs Capital Partners is a prominent example. There's also the proposed $2.8 billion acquisition of rural wireless firm Dobson Communications Corp. by AT&T Inc. and the announced $557 million purchase of McLeodUSA by Paetec Holding.
Other companies, such as Sprint Nextel Corp., U.S. Cellular Corp. and Telus Corp., have enjoyed stock gains based on takeover potential.
The average telecommunications stock fund is up 28 percent over the past 12 months, according to Lipper Inc. That compares to the 16 percent gain of the average U.S. diversified equity fund.
"A lot of factors that include increased mobility and media convergence are fitting together to really drive telecom growth and innovation in the U.S. and globally," said Henry Ellenbogen, manager of the $2 billion T. Rowe Price Media and Telecommunications Fund (PRMTX), which has had a total return of 40 percent over the past 12 months, with a three-year annualized return of 30 percent.
The question is how long the good times will last before the industry may fall prey to an economic downturn. Inherent turbulence in this sector is the reason why it should never constitute more than a modest portion of an individual's portfolio.
Among those telecoms serving specific industry needs that have rewarded their shareholders:
- America Movil SAB (AMX), Latin America's largest wireless operator, is up 42 percent this year after last year's 54 percent gain. Among its growing markets, it holds 70 percent of the wireless market in Mexico and has 8.6 million customers in the U.S.
- American Tower Corp. (AMT), a leading U.S. operator of broadcast communication sites in the United States, Mexico and Brazil, is up 17 percent following last year's 38 percent increase. It next plans expansion into India. Predictable revenues flow in from wireless carriers AT&T, Sprint Nextel, Verizon Communications Inc., T-Mobile USA Inc. and Alltel.
- Sierra Wireless Inc. (SWIR), a British Columbia manufacturer of cellular PC cards and embedded wireless modems, is up 49 percent following last year's 27 percent gain. Wireless data is a hot segment in the handset market, and the company boasts strong finances as well.
"Demand for wireless services has been extremely robust, especially in China, with companies such as China Mobile Ltd., and in Russia with Vimpel-Communications," said David Weissman, senior analyst with Zacks Equity Research in Chicago. "In the U.S. some saturation in subscriber growth has wireless carriers beefing up their revenues by offering new services such as Internet access, BlackBerry services and e-mail to cell phones."
He is confident about the future because, in a softening economy, all businesses will try to make more effective use of their employees. That should increase the need for wireless remote office capabilities, he said. His favorite stocks are Vimpel-Communcations, China Mobile, Sierra Wireless and the wireless data gear manufacturer Novatel Wireless Inc.
"Portfolio managers are looking toward niche areas for investment ideas and shying away from the AT&Ts and Verizons because they have driven returns by cutting costs and it will be difficult to continue to deliver this way," said Marta Norton, telecommunications fund analyst with Chicago-based Morningstar Inc. "They're looking in areas less mainstream."
Her favorite fund is T. Rowe Price Media and Telecommunications because Ellenbogen is a fine stock picker with experience. The fund has just over half of its portfolio in telecom and the rest in media, which also gives it a broader mandate that eases volatility.
American Tower, America Movil and the wireless tower company Crown Castle International Corp. are among the fund's largest holdings. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has a low annual expense ratio of 0.87 percent.
"We have owned stock in America Movil and India's Bharti Airtel [traded in India with no American depositary receipts] for more than two years," said Ellenbogen, who rarely replaces more than one major telecom holding each year. "In emerging markets the gross domestic product is spreading out and consumers can now afford telecom, so communication is needed."
Another fund that Morningstar's Norton considers noteworthy is the $365 million DWS Communications Fund "A" (TISHX), which has more than 70 percent of its holdings in telecom. It has had total return of 28 percent over the past 12 months and has a three-year annualized return of 25 percent. It requires a 5.75 percent load and $1,000 minimum initial investment. The annual expense ratio is 1.49 percent.
"I see the telecom trends going forward as not being that different from past years, and I make a point to own companies that can hold out in a choppy economic environment," Ellenbogen said.
Andrew Leckey is a Tribune Media Services columnist.
YOUR MONEY: A WEEKLY GUIDE TO PERSONAL FINANCE