Wall Street Week Ahead: Supercharged telecom sector
could become investor favorite
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[June 23, 2018]
By Noel Randewich
SAN FRANCISCO (Reuters) - An overhauled
telecommunications sector featuring most of the so-called FANG stocks
could debut as Wall Street's hottest bet when it kicks off in September,
boosted by a rising wave of media and television acquisitions.
Long viewed as stodgy stocks for dividend-oriented investors, the
telecom services sector <.SPLRCL> will be renamed communications
services and supercharged with the addition of Facebook <FB.O>, Netflix
<NFLX.O> and Google-owner Alphabet <GOOGL.O> - three of the four FANGs,
along with Amazon - as well as other companies that have driven the
stock market to record highs in recent years.
The changes are part of the largest-ever shakeup of the stock market's
broad business categories.
In total, 14 S&P 500 companies, including Netflix, will shift from the
consumer discretionary sector into communications, joining AT&T, Verizon
Communications <VZ.N> and CenturyLink <CTL.N> in the biggest shakeup of
the Global Industry Classification Standard, or GICS, since it was
created in 1999. Five S&P 500 companies will switch from technology to
The new sector will also include Walt Disney <DIS.N>, Comcast <CMCSA.O>
and other entertainment and media companies scrambling to consolidate
and fend off competition from newcomers Netflix and Alphabet, which
produce content and sell it directly to consumers.
The floodgates for such deals were sprung open this month by a legal
ruling giving AT&T <T.N> the go-ahead to buy Time Warner for $85
"Among all of the sector groups, this is going to be the most dynamic,"
predicted Jack Ablin, chief investment officer at Cresset Wealth
Advisors in Chicago. "You will see a lot of deal activity in the coming
months, and it will be an awakening for anyone who is not on top of it."
Amazon.com <AMZN.O>, the fourth FANG stock, will stay in consumer
discretionary and represent nearly a third of that sector.
Classifying companies within 11 major sectors and several sub-sectors,
GICS is closely followed by sector analysts and investors. Its overhaul,
which has yet to be finalized, aims to reflect the evolution of the
media, telecommunications and Internet industries.
Getting a head start on the September revamp, State Street Global
Advisors on Tuesday launched the Communication Services Select
Sector SPDR Fund <XLC>, benchmarked to the sector's future
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York, U.S., June 19, 2018. REUTERS/Brendan McDermid
Reflecting Wall Street's willingness to pay top dollar for companies like
Alphabet, Netflix and Activision Blizzard <ATVI.O>, the newly constituted
communications sector would trade at 19 times expected earnings, nearly double
the sector's current multiple, according to Thomson Reuters I/B/E/S.
Earnings of the newly constituted communications sector are expected to jump 23
percent in the final quarter of 2018, compared with an estimated 12 percent
increase under the sector's current configuration.
For graphic on Consensus Q4 EPS Growth of Newly Configured Sectors click
For graphic on Forward P/E of Newly Configured Sectors click
Over the past five years, the telecommunications sector has had a total return
of just 16 percent, including dividends. Under its new configuration, it would
have had a total return of 110 percent and outperformed the S&P 500's 85 percent
return, according to Credit Suisse equity strategist Patrick Palfrey.
Media, television and wireless companies, all of which will become part of the
Communications sector, see buying content producers as a way to add revenue.
Twenty-First Century Fox <FOXA.O> has surged 20 percent since June 13, when
Comcast offered $65 billion for its media assets, outbidding an offer from Walt
Disney, which responded on Tuesday by raising its bid to $71 billion.
Sprint <S.N>, T-Mobile <TMUS.O>, Viacom <VIAB.O>, CBS <CBS.N>, Dish Network
<DISH.O> and Discovery <DISCA.O> have risen between 6 percent and 34 percent in
Even if M&A speculation subsides before the GICS changes take effect, the
addition of most of the FANGs and several other high-growth former tech stocks
will make the communications sector attractive, said Michael James, managing
director of equity trading at Wedbush Securities in Los Angeles.
"Interest in the sector and the individual names is not going to dissipate,"
(Reporting by Noel Randewich; Editing by Alden Bentley and Dan Grebler)
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