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You Won't Believe What the Best Value Investors Are Buying Now

By Stansberry Research Interview Series
Wednesday, April 25, 2007

Telecom is back.
 
While the rest of the investing world focuses on the housing bubble, interest rates, and Iran, the telecom sector has quietly been proving itself to be one of the best investments of the last nine months.
 
Starting in July of last year, the U.S. telecom ETF has soared.  It's nearly doubled the performance of the S&P 500. Verizon (VZ) is up 22%, and AT&T (T) has rallied nearly 50%. Sprint Nextel (S) has rallied 20% but is breakeven for the period due to weak earnings in early August 2006.
 
What's going on here is simple... sectors that become immensely overvalued usually require seven to 10 years to disgust investors and become bargains again. And telecoms have been plenty disgusting since the tech bubble burst in 2001. All three of the telecom majors are down between 30% and 60% from their tech-bubble highs.
 
But it's beginning to change.
 
The massive debts incurred during the fiber-optics expansion from 1998 to 2001 have been written off. The new technology (high speed internet, cell phones) is now widely accepted. And the industry as a whole has completed a strong period of consolidation (SBC bought AT&T, Sprint bought Nextel, Verizon bought MCI).
 
Simply put, the U.S. telecom industry has stabilized and grown in profitability in the last two years. Today, AT&T and Verizon are producing free cash flow of $7 billion a year. Even Sprint is producing $5 billion.
 
It's hard to believe, but nowadays these companies are actually value plays. All three are now throwing off more free cash than they were during the tech bubble.
 
Verizon is generating enough free cash flow that it could take itself private. Sprint Nextel is trading well below its five-year average for its price-to-cash flow multiple. AT&T's 2006 earnings are on par with its tech-bubble levels. Yet the company's share price is 30% cheaper than in 2001.
 
Even at today's levels, these companies are still relatively cheap. So cheap that the world's best value investors have begun piling into the sector.
 
Company
Owners    
Holdings
Verizon 
David Dreman
Tweedy, Browne 
$148 million
$740,000
AT&T  
Charles Brandes
David Dreman
$555 million
$16 million
Sprint Nextel  
Mason Hawkins
George Soros
$1.4 billion
$7 million
 
The irony of seeing Mason Hawkins and David Dreman buying telecom stocks is almost overwhelming. Hawkins manages the Longleaf family of mutual funds. Over the last 10 years, he's shown investors average annual gains of 12%, trouncing the 8% gains of the S&P 500 for the same time period. He's a value investor to the core. The same can be said of Dreman, whose Large Cap Value Fund has shown investors average annual gains of 17% since 1991.
 
Ten years ago, these guys wouldn't have touched a telecom company with a 10-foot pole. Yet today, they're buying large-cap telecom stocks with hundreds of millions of dollars.
 
That's contrarian investing at its finest.
 
Good trading,
 
Graham




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Market Notes
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Shipping still booming:  DryShips, Omega Navigation, and Quintana Maritime at yearly highs.
 
Infrastructure and building plays continue to lead the market. New highs for Kennametal (cutting tools), Terex (heavy equipment), Cummins (diesel engines), and AK Steel (steel).
 
Earnings today: Akamai, ConocoPhillips, EnCana, America Movil, Raytheon, and Exelon.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%