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Wireless Stocks Won't Stay Tied Down

Posted: Apr 01, 2009 15:50 PM by James Brumley

Tickers in this Article: CHU, TU, IPCS, DCM, VOD, MBT, TMB, CHL

If there’s one surprising lesson investors learned in 2008, it’s this - stocks don’t always trade at what they’re worth. Oh, don’t get me wrong. Most of the stocks that got crushed last year fully deserved the beating they took. However, a few of those hard-hit stocks were unduly punished. This painful fact should be a sobering reminder that though fundamentals are still meaningful, trying to catch a falling knife (i.e. a falling stock) can be dangerous. That’s why I’m still looking for stocks with a little bullish momentum on top of compelling corporate results. And, for me, the wireless industry won that contest in March, hands-down.

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Reality Rules
Year-to-date, the Dow Jones Mobile Telecommunications Index is up 35.3%. That’s among the very best for all industries, and easily tops the Dow Jones Industrial Average’s year-to-date loss of more than 11.4%. The results are impressive enough on their own, but even more palatable is the consistency of the wireless industry’s gains.

Since the end of December, the wireless index has not posted back-to-back weekly losses. Moreover, only five of those fourteen weeks have been losers, allowing the mobile telecom index to rally 82.6% off its November low. That’s not bad for any environment, but it’s stellar when in the throes of a recession/bear market. The thing is, these stocks deserved to rally. More than that, they deserve to rally some more. The average stock in the wireless group is still nearly 75% under its 2007 high…. a hint that they were the innocent victims of the bear’s rampage.

Fundamentally Speaking
The biggest pure play in the group - China Mobile Limited (NYSE:CHL) - is not only a worthy holding, but it’s also a good proxy for the entire industry.

Has China Mobile been impacted by the recession? You wouldn’t know it based on the numbers. The second half of 2008 was better than the first half, in terms of revenue as well as earnings. And the first half of 2008 was better than the second half of 2007. Yet, CHL shares sank 41% in calendar ’08… contrary to the earnings trend. Shares have gotten a little relief so far in 2009, but the twelve-month price-to-earnings ratio is still a modest 11.

Could shares be priced for the future rather than the present or past? Maybe. But, even if they are, they’re still a bargain. Over the last 12 months analysts have reeled in earnings-per share estimates for 2009, from $5.11 to $4.17, which still translates into a forward-looking earnings multiple of 10.5. This reduced estimate may have been unnecessarily pessimistic. At $4.17 per share in 2009, China Mobile would be earning less than 2007’s actual income per share, completely disregarding the company’s growth in the face of a recession. China Mobile earned $5.54 per share in 2008, meaning if analysts are right about 2009 (which doesn’t seem likely), income will be reduced by 24% in a year where the global economy is stabilizing…. after the company increased income by 29% in a year where the economy was anything but reliable. The expectation just doesn’t jive with the history.

It’s not just China Mobile though - the same story could be told about most of the companies in the group.

Picks of the Litter
I mentioned above how I was looking for stocks with: a) bullish momentum and b) impressive fundamentals. Well, the world’s second- and third-biggest wireless stocks Vodafone Group Plc (NYSE:VOD) and NTT DoCoMo Inc. (NYSE:DCM) are on target when it comes to fundamentals, but their stocks are still floundering…. as is China Mobile’s to some degree.

I think any or all of these names could put up some surprising numbers in 2009.

Company	Trailing P/E	Forward P/E	YTD Return
China Unicom (NYSE:CHU)	7.7	11.7	-14.7%
Mobile Telesystems (NYSE:MBT)	6.2	6.8	12.1%
TELUS (NYSE:TU)	9.3	8.0	-7.3%
iPCS Inc. (Nasdaq:IPCS)	N/A	8.4	42.1%
Telemig Celular Participaceoes (NYSE:TMB)	5.8	8.0	18.8%
As of market close March 31, 2009

So where’s the strength coming from in the industry? As well as the Dow Jones Mobile Telecom Index has performed of late, we’re seeing better all-around numbers from a handful of overseas mobile service providers. So, they may actually be even better bets than the ones you could make with domestic names.

My top five picks (above), based on current and future valuation projections (particularly after any recently-adjusted forecasts), bullish momentum and a large degree of room to continue recovering from recent drawdowns. Two year-to-date losers - China Unicom (NYSE:CHU) and TELUS (NYSE:TU) - made the cut, as they’ve pushed well off February’s lows and are now above some major resistance lines. (Discover how these influential levels can switch roles in Support And Resistance Reversals.)

By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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