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Expect More M&A After T-Mobile Closes the DISH Deal

DISH Network (DISH) is the latest player in the consolidation of telecommunications and cable companies, which helps prove that, at the very least, broad bets on telcos and cable companies are smart this year.

dish-network-stockTrue, DISH is a satellite TV company, but it serves the same role as a cable asset. And after announcing the deal, DISH stock jumped more than 7% at the opening bell, which makes sense given that it’s the target in the deal. DISH’s suitor — T-Mobile (TMUS) — rallied 5.7% at the opening bell.

Although it’s doubtful that either stock has significantly more upside after today’s moves, it’s not impossible. Even more likely is continued outperformance for pretty much any name in the telco and cable sector.

DISH stock is suitable for arbitrage bets at this point, but it’s not a good fit for most retail investors. Sorry, guys, but you missed the upside boat on this one.

As for TMUS, the stock will likely consolidate a bit after today’s big move. That’s only natural after this kind of gain on surprise news.

Besides, T-Mobile has run up all year, gaining a whopping 50% year-to-date. It wouldn’t be unusual if this costly acquisition — one in which key details have yet to be sorted out — put something of a lid on TMUS stock for the rest of this year.

One thing that does seem certain is more mergers and acquisitions. With TV increasingly moving online, the only way to maintain leverage with content providers is to get bigger. At the same time, the growth of mobile streaming makes content providers and distributors valuable to wireless companies.

DISH Stock Is Just the Latest Winner

Stocks in the cable and telecommunications sector are mostly having an excellent year. Even Verizon (VZ), the odd man out amid all this deal-making, will likely bounce back after a sharp selloff on the deal news. Before Thursday’s drubbing, VZ was up more than 5% this year. VZ might be running out of targets — AOL (AOL) doesn’t count — but it’s unlikely the market will just give up on the possibility of VZ doing something splashy.

As for the DISH and T-Mobile deal, it should fuel speculation of more M&A (it sure just turned up the heat on VZ). Mega-deals in the works include AT&T‘s (T) $49 billion purchase of DirectTV (DTV) to create the nation’s largest pay-TV company. Plus, there’s Charter Communications‘ (CHTR) $67 billion acquisition of Time Warner Cable (TWC) and privately held Bright House Networks to form the second-largest cable company in the U.S.

It’s hard to see VZ standing pat amid the chaos. The same goes for Sprint (S). Sprint stock — once a target of DISH — fell on the deal news, too. If these companies don’t pull something off, they risk becoming also-rans amid the conflation of TV with broadband and mobile distribution.

A price-weighted portfolio of the largest telecom and cable stocks is up 11% year-to-date. Exchange-traded funds with exposure to cable companies — such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Media Portfolio (PBS) — are beating the S&P 500 by more than 4 and 5 percentage points, respectively, for the year-to-date.

Heck, even the poky Vanguard Telecommunication Services ETF (VOX) is beating the broader market by more than a couple of points so far this year.

Deals tends to spawn more deals. So, it’s safe to say we’re nowhere near done with M&A in the pay-TV and telecom sectors. That alone should support continued outperformance for a wide range of names.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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