5 Best Telecom and 5G Stocks to Buy Now for 2020
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Finding the best telecom and 5G stocks while avoiding streaming wars pain
The communication services sector has been turned on its head lately, adding in companies from Facebook to Disney. From 5G stocks to traditional telecom plays, there’s a lot of opportunity here but also a lot of risk in the rising streaming wars.
I’ll show you how to pick stocks in the sector and reveal my top stocks to buy for your 2020 portfolio.
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Big Changes in Communication Services Sector
Nation, few stocks sectors are going through as much change as the communications sector. Between the rollout of 5G and the intensifying streaming wars, the sector represents some great returns but also huge risk for investors.
You absolutely must know this sector, the opportunities and the risks in these stocks!
That’s what we’ll do in this video. I’ll walk you through how to look at this new telecom and 5G sector of stocks, what to look for in the companies. Then I’m going to reveal two communication services stock funds and five stocks to put on your watchlist for 2020.
It’s part of our 11-video series, uncovering the best companies in each stock sector. Over these 11 episodes, one for each stock sector, I’ll show you how to pick the best of breed in each. We’ll look at some of the big trends and how to pick stocks to buy, then I’ll reveal my five favorite stocks in each.
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What is the Communication Services Sector?
Here’s what we’re looking at when we talk about the communications services sector and I actually had to update the graphic we’ve been using to include these new industries. In this sector, you’ve got the old school telecom players in wireless and broadband but also a lot of entertainment companies, internet services and media.
You see, back in 2018, S&P and MSCI, the two largest index providers said they were going to change the old telecom sector to a new Communications Services sector to reflect more than just those old phone companies.
They pulled in a lot of industries from consumer discretionary and technology, companies like Facebook, Netflix and Disney were put into this new sector. It actually took it from being one of the smallest sectors by market size to one of the largest.
To put it another way, those old telecom stocks, the AT&T and Verizons, now make up just 11% of the sector so this change basically blew the group up by a factor of ten-times.
So we’re talking about a lot of different industries and business models here and that’s always dangerous when you’re talking about a sector as a whole.
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Telecom and Communication Stocks Returns
The stocks in the new sector have produced a 9.9% annualized return over the last decade and 12.7% a year over the last five years. That’s a little under the average return on the overall stock market, basically a lot of the internet names and FANG stocks have outperformed while that old telecom sector lagged the rest of the market.
On a price-to-earnings basis, it’s one of the more expensive sectors in the market. We see here our FactSet chart we’ve been using for the series. It shows the price of stocks in the sector versus the forward earnings expected by analysts, so a PE ratio based on earnings expected over the next year.
The communication services sector is there in the middle with a PE ratio of 17.2-times, just over the price-to-earnings on the overall stock market.
Now there are two things to remember here. First is that we’re not just talking about how expensive the stocks in the sector are against the market but also how expensive they are against their own PE history. We’ll get to that next. Also though, you’ve got to remember the huge difference in companies now in the index.
Within the sector, you’ve got old telecom stocks trading around 10-times earnings which is about right for that level of growth. You’ve also got those internet stocks trading for 25- and 30-times earnings which might also be OK given their level of growth.
So that 17-times price-to-earnings might not be as cheap as it looks given the different stocks here. If you look at the ten-year average PE ratio on the sector, so that green bar and a 14.6-average, we see that stocks in the sector are trading at about a 20% premium to their long-term average.
It’s not as expensive as the 30% premium on tech stocks or the utilities sector but it’s still 20% more than you would have paid over that longer-run average.
Investing in 5G Stocks and Avoiding the Rest
I’ve actually got mixed feelings about the stocks in the sector. You’ve got some massive potential in the old telecom names and 5G stocks. These companies have been investing billions in their 5G network for years and are now ready to start reaping the reward over the coming years. Capital spending will come down and cash flow should increase, which is always a recipe for higher earnings.
With 5G you’re going to see an explosion in electronic devices that connect to the internet. This revolution in the Internet of Things, should help those telecom players as well as some companies in other sectors like appliance manufacturers.
Another industry that nobody is talking about in this sector, and one I’m going to highlight in our five stocks to watch, is media advertising. Internet ad spending is expected to approach $300 billion this year and will account for more than half of all advertising dollars within the next couple of years.
That’s a big opportunity for some of the stocks on our list.
Against the optimism for some of these trends, the first shots are being fired in the streaming wars and it is going to be BLOODY! Netflix has always been a big spender on producing its shows but that’s going into overdrive against the new competition from a string of big media companies.
Not every company is releasing exactly how much it’s going to spend on streaming content. For example, Disney has budgeted $23 billion for everything and has given clues that streaming will be around $2.5 billion of that. Between just these seven players, you’ve got almost $50 billion in cash flow going to produce streaming content.
I’m not denying that streaming platforms will bring in the dollars. Online and mobile viewership is still growing. But the race to produce content, the billions spent on the hope that subscribers will come, I do not think it’s going to play out as well as these companies or investors think.
This is why Google-owned YouTube shut down its own content production house earlier in the year and is doubling-down on user-generated content. It’s an arms race in content and nobody is going to win.
Best Communication Services Funds to Buy
So before we get to those five telecom and 5G stocks I think you SHOULD be watching, I want to highlight a couple of funds here.
First is the Communication Services Select Sector SPDR, ticker XLC, and this might be an easy way to get that growth in 5G or internet of things along with the stability in telecom.
The fund holds 27 companies with an average market cap of $385 billion so we’re talking massive companies here including Facebook, Alphabet which is the old Google, and Disney. You can see, that old school telecom is just over 13% of the portfolio with the other three industries representing a larger chunk.
It only pays a 0.9% dividend yield, so not what you’d expect from the old telecom sector, but it’s on those new internet and media companies that aren’t paying anything.
An alternative here with a global perspective is the iShares Global Communication Services ETF, ticker IXP.
This one charges a higher expense ratio at 0.46% but also offers a 3% dividend yield and some broader exposure to more companies. This one holds shares in 69 companies with about two-thirds based in the U.S. but also some exposure to Asia and Europe.
Best Telecom and 5G Stocks to Buy for 2020
Now I want to get to those five stocks that made the list, five stocks to watch from the sector for your 2020 portfolio. A couple of notes here. I used the same screener we’ve used in the other videos so if you haven’t watched our first video on tech stocks to buy, check that out because I detailed the factors I’m using to pick stocks.
I also tried to pull some of the best stocks from different themes or industries for the list. I pretty much avoided the streaming stocks for the reasons we’ve talked about but did grab another media name.
Verizon Communications, ticker VZ, is my favorite pure-play on that telecom space with a 4% dividend yield.
Now I know a lot of you in the nation love AT&T but it’s got so many things going on from the Time Warner acquisition and DirecTV and streaming. Besides trying to fight the streaming wars, there are a lot of balls in the air right now and I think something is going to be dropped.
Verizon is much more a pure-play on that 5G story with 70% of revenue from wireless. It still has some fixed-line operations which are about 12% of revenue and enterprise services that make up 10% of sales.
Wireless customer growth has been strong this year. The company just reported its strongest third quarter in five years, adding over 400,000 customers. Sales per account is also growing, doubling from a year ago.
Shares are trading for just over 12-times earnings which are expected to grow 2.9% over the next year but could add another percent or two on management’s history of beating expectations.
Analysts have a low target on the shares at $55 with an upside to $70 per share on the high end and remember, this is on top of that dividend yield.
Increasing digital ad spending should help The Interpublic Group, ticker IPG, as the fourth largest ad company in the world. The 2018 acquisition of data solutions provider Acxiom helped expand IPG into the digital market and data.
Shares have been flat for the better part of a few years and some significant customer losses last year held the company back but things are turning around this year and look better for 2020.
Shares trade for just 11.4-times earnings which are expected flat over the next year but will likely be a few percent higher given management’s history of beating expectations.
There are only two analysts covering the shares here so tough to read anything from this chart but a low target of $23 per share and $26 at the high end. That’s on top of the 4% dividend yield and this could be a surprise stock of 2020.
Next is WPP, at $16 billion, the largest advertising company in the world with traditional and digital ads, public relations and consulting. WPP is based in the U.K. but truly a global company doing business in over 100 countries.
The shares have been under pressure the last couple of years but signs of a turnaround are beginning to show. The company reported revenue growth in the first three quarters with some big account wins like Huawei in China and Signet in North America.
WPP cut more than 700 million British pounds of debt off its balance sheet over the last year with $3.1 billion expected from the Kantar disposition expected in 2020. Shares trade for about 15-times earnings and pay a solid 6% dividend yield with some further price appreciation on the upside.
China Mobile, ticker CHL, is not only one of the strongest telecom plays but also a great way to get exposure to the Chinese consumer market.
The telecom company controls 61% of the 4G market and 60% of the total wireless market. With 916 million subscribers, it’s the largest telecom in the world and despite this ginormous size already, it’s still posting some astonishing growth. China Mobile also became the country’s largest fixed broadband provider last year, controlling 42% of the market and accounting for 73% of all new broadband customers versus the other two telecoms China Unicom and China Telecom.
China is determined to be the leader in 5G, it’s said so publicly and this is one of the first tech evolutions where it really has a chance to set the pace and it’s going to do it. That’s going to open up a lot of opportunity for telecoms and the broader economy. IoT smart connections among corporate clients increased 154% in the first half of last year to 384 million, that’s already more than the entire population of the United States.
Shares pay a 5% dividend yield and the company pays out 48% of profits to the dividend which is solid but still obviously leaves lots of money for growth. At a price-to-sales ratio of 1.6-times which is well under the 2.1-times average over the last five years, the shares are a good deal here for new investors.
News Corp, ticker NWS, is probably going to surprise a lot of you but I think there’s more here than the market is seeing.
This is a much smaller company after the Fox spinoff and sell of assets to Disney. About a third of the operating profits come from that traditional print media business but News Corp also has its hand in Australian pay TV and digital real estate advertising. Its digital ad business is doing well and I think underappreciated by the market.
Shares trade for 39-times earnings which is pretty darn expensive and earnings are expected lower over the next year. I think the company could announce a few more asset sales though which could really boost its cash position. The company has a strong balance sheet with $700 million in net cash, very little debt and still some strong brands in its portfolio.
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Changes to the telecom and communication services sector have made this a very difficult group to analyze. 5G stocks and traditional telecom names will do well while media stocks may run into trouble with the streaming wars. Look at the industries separately and invest in only the best of breed stocks.
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