The S&P 500’s three-company telecommunications services index is on the verge of being folded into a much higher-profile group, but a shining spotlight may not be enough to jump-start the stocks as investors continue to like growth sectors.
The three telecom stocks in question:
Verizon Communications Inc (VZ)
AT&T Inc (T)
CenturyLink Inc (CTL)
…will be melted into a newly-minted S&P 500 Communications Services Sector. This is in addition to high-flyers that also include Netflix Inc (NFLX), Alphabet Inc (GOOGL) and Facebook Inc (FB).
The telecom sector has been the biggest declining stock among the S&P’s 11 major sectors with a 4.4-percent decline so far in 2018, driven by AT&T’s 13.3-percent drop. In comparison, many of the other companies joining the group have shown strong gains for the year with Netflix rising 91.5 percent, Twitter (TWTR.N) rising 21.7 percent and Alphabet rising 10.8 percent.
But a number of investors that are active in the market may still avoid telecom stocks, which are generally seen as defensive investments. The reason is that, that these stocks move slower, though relatively predictable, growth rates and high dividends.
“Telecoms are likely to fade into the background,” according to Patrick Palfrey, an equity strategist at Credit Suisse. “Investors aren’t going to look to communications for dividend yield. They’re going to look to it for businesses that have a tremendous opportunity to grow.”
“If you wanted to own safety or dividend yield you’d go to real estate investment trusts or utilities. Those sectors are uniformly one theme. That’s dividend yield,” said Palfrey.
Wall Street is anticipating the S&P 500 communications sector to create 21 percent earnings growth and 11.1 percent revenue growth for 2018, compared with 16.7 percent earnings growth and 7.4 percent revenue growth for the telecom stocks, according to data collected by Thomson Reuters.
State Street Global advisors made the Communication Services Select Sector SPDR Fund (XLC) ETF mirror the reclassified sector while Vanguard created the Vanguard Communication Services index fund (VOX).
Growth funds with large-cap investments have been sharply outperforming large-cap value funds with a 16.4-percent increase in value so far in 2018 while value counterparts gained 4.4 percent. In the last five years, growth funds rose 14.9 percent versus 10 percent for value funds, according to Lipper data.
Some stock pickers may take a fresh look at the telephone companies when they join the bigger index, which will make up 10 percent of the S&P 500 compared with the current telecom sector’s a 2 percent weighting, according to Todd Rosenbluth, Director of ETF and mutual fund research at CFRA.
“Telecoms is probably one of those areas where people have been leaning too heavily on the negative side,” said Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute in St. Louis.