We have owned Verizon (VZ) and AT&T (T formerly SBC) since February 2004. Both companies were deep value, high dividend plays. Like most undervalued blue chips, often things take a few years to turnaround.
For value investors, the cash register is beginning to ring. Here are some recent technical comments from Dorsey Wright on the telecoms:
In yesterdays report, we discussed how Financials were starting to gain traction, especially compared to their Energy brethren. This potential (sector) rotation fits in with our discussion on the market, and how it might take on characteristics similar to that of 1994 which was truly a year that was typified by sector rotation. In line with this potential rotation scenario, we have seen another sector that is starting to ring up returns the Telecom sector; and in particular, it is the Baby Bells that are calling for our attention.
More glaring on a performance basis is the returns of the Baby Bells, both individually, and as represented by ETFs, such as the iShares Dow Jones U. S. Telecom [IYZ] and the Telecom HOLDRs Trust [TTH]. For the past three years, these stocks and ETFs have been notable laggards, posting gains half to a fifth of what the market has given you. But notice the recent performance; in the first two months of 2006 we are seeing just the opposite. The broad Telecom sector is significantly outperforming Energy, while also posting superior gains over the SPXEWI. But what is more noteworthy is the performance of the Baby Bells. For example, BellSouth [BLS] has rung up a gain of 16.79% so far this year, while Verizon [VZ] is up 13%. Even the old mother of the Babys AT&T [T], is ringing the performance bell with its hefty gain of 13.4% for two months of action.
Basically, another word for this recent action is positive relative strength. Albeit in the very short-term, but nonetheless it is something to recognize. The fact that BLS, T, and VZ are in the Top 5 in X Rank shows that the Baby Bells are gaining traction compared to their Telecom peers.
The TTH (Exchange Traded Fund), which is even more heavily weighted with the Baby Bells -- 71.6% of its move is attributable to T,VZ, and BLS, has worked sideways for several years, forming a multi-year base. The ETF is now testing the top of this base, with resistance at 30. A move to 31, though, would be major buy signal as it would break the TTH out of this base, resulting in a spread quadruple top buy signal. Should that occur, we could then see a test of its long term trend line at 34, which dates back to early 2000, too.
Besides an improving technical picture, though, is the dividend yield these stocks offer:
BellSouth (BLS) 3.67%
AT & T (T) 4.82%
Verizon (VZ) 4.81%
iShares Telecom (IYZ) 3.27%
Telecom HOLDR Trust (TTH) 3.72%
So for those inclined to buy income producing stocks, the Baby Bells are worth consideration here.
Dorsey Wright
