In times past, when feelings of uncertainty in the market rose to uncomfortable levels, investors would turn to the safety and simplicity of the utilities sector to protect their capital while still generating dividend-based revenue.
While utilities may still be a viable safe haven, many investors are expanding their horizons to telecom stocks — the sexy alternative to utilities in the digital age.
Telecom stocks share many of the same characteristics that have made utilities so attractive over the years. They have massive infrastructure advantages over potential competitors who might try to enter the market in the future, they pay hefty dividends and they have a loyal — if not trapped — customer base.
The Telecom Stock Advantage
The advantage telecom companies have over utilities that makes them so sexy is their ability to command a premium for their products and services (which are also sexier — a coal-burning power plant has got nothing on an iPhone).
Utilities are strictly regulated in terms of what they can charge for the services they provide. Telecom companies, on the other hand, can charge huge premiums for the products and services they provide.
You want high-speed internet? Sure, telecom companies will give it to you … for a price. You want the latest new smartphone? Sure, telecom companies will give you a great deal on the front end … so long as you pay for it on the back end.
In the digital world in which we live, products like high-speed internet and mobile-phone service are no longer luxuries. They are necessities. This makes telecom companies a good bet during both economic expansions and contractions — the epitome of a defensive industry group.
You can see this defensive advantage playing out incredibly well so far during 2016. In the United States, Verizon Communications Inc. (VZ) and AT&T Inc. (T) have both had a great year. You can see in Fig. 1 that VZ is up nearly 20% year-to-date, while T is up more than 22% YTD (see Fig. 2).
Things are going equally well for telecom across the border in Canada: BCE Inc. (USA) (BCE) is up more than 20% YTD (see Fig. 3).
Telecom is even surging in Taiwan, where Chunghwa Telecom Co., Ltd (ADR) (CHT) is up 17% YTD (see Fig. 4).
With the United Kingdom’s vote to leave the European Union, a shaky global economy and uncertainty over what monetary-policy actions central banks around the world are going to take next, traders on Wall Street are likely to maintain a slightly defensive posture in the near term, which should be great for telecom stocks.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.