Telecommunications stocks have underperformed the overall market over the past year. The iShares U.S. Telecommunications ETF (NYSEARCA:IYZ), the largest pure telecom ETF, has been flat, while the S&P 500 has rallied by 19% during this period. This contrast can likely be attributed to several factors, notably rising interest rates.

In particular, telecom companies typically carry significant debt due to their capital expenditure-heavy business model, which requires substantial investment in infrastructure and technology. With interest rates remaining relatively high, the cost of servicing this debt is rising, compressing profitability and weighing down stock prices.

While this holds for most telecom stocks, some names seem attractively priced at their current levels. These three top telecom stocks to buy now offer promising potential for investors looking to capitalize on undervalued opportunities in the sector. These picks are based on their strong fundamentals, overall moat and notable capital returns, making them compelling for summer buys.

Charter Communications (CHTR)

Charter Communications (NASDAQ:CHTR) appears to be a top pick in the telecom sector at its current price levels. Charter is the second-largest cable operator in the United States, with over 32 million residential and business customers.

What makes Charter compelling, in general, is its significant competitive edge, thanks to its vast network infrastructure, cutting-edge broadband technology and a wide range of services. These strengths allow Charter to generate strong, steady cash flows bolstered by consistent subscriber growth and impressive customer retention rates.

Over the past couple of years, a major headwind to Charter’s stock price has been its heavy debt load. With interest rates on the rise in recent years, Charter’s $96.7 billion net debt position has challenged its investment case. Despite this, Charter has taken steps to mitigate the impact by halting new debt issuances and shifting focus towards using free cash flow to deleverage.

In the meantime, the company has been executing aggressive share buybacks, leveraging the stock’s depressed valuation to create shareholder value. At a forward P/E of just 10.8x, Charter seems to offer a wide margin of safety and strong potential for appreciation following a P/E expansion.

Verizon Communications (VZ)

Verizon Communications (NYSE:VZ) is another intriguing pick in the telecom sector. Despite shares rallying by roughly 17% over the past year, they are still trading at relatively depressed levels. Over the past five years, the overall underperformance has left Verizon undervalued, especially given its solid operational results.

Specifically, Verizon’s most recent Q2 results showed revenues edging up 0.6% year-over-year to $33.0 billion, driven by gains in its broadband and business segments. Verizon also reported a 3.5% rise in Wireless Service revenues, indicating accelerating growth from Q1’s growth of 3.3%. Verizon’s adjusted EBITDA increased by 2.5% to about $12.3 billion thanks to effective cost management. Finally, free cash flow for the year’s first half rose by 6.3% to $8.50 billion.

These results reinforce Verizon’s capacity to cover its dividend, further supported by an estimated $18.7 billion in free cash flow for the year, comfortably covering its $11.1 billion annual dividend commitment. While Verizon’s substantial net debt of $175.8 billion is a notable concern, its rock-solid cash flows and dependable dividend make it a robust choice in the telecom industry. With a forward P/E of just 8.7x, Verizon stock seems like a deep value play at its current levels.

BCE (BCE)

My third pick is BCE (NYSE:BCE), a powerhouse in the Canadian telecom market. BCE’s extensive network and diverse service offerings give it a substantial competitive edge. Its dominant position in Canada allows BCE to enjoy significant pricing power and customer loyalty. This is backed by the company’s recession-proof business model, highlighted by an extraordinary track record of growing its dividend for 15 consecutive years and never cutting it since 1949.

Despite its strong fundamentals, BCE’s stock has taken a hit recently, offering a massive dividend yield of 8.7%. This sell-off ties back to rising rates, which, as discussed earlier, have put pressure on telecom stocks due to their heavy debt loads. Yet, BCE is particularly well-positioned to navigate this challenging macro environment. Its robust cash flows, stemming from essential services like internet, TV and mobile, provide a solid financial foundation.

BCE’s ability to consistently perform highlights its strength, even during economic downturns. The company’s critical infrastructure ensures stable and recurring revenue streams, making it a reliable choice for investors seeking stability and income. With the stock trading at a forward P/E ratio of 15.5x — near a decade-low — and offering a dividend yield not seen this high since the 1990s, BCE forms a particularly attractive investment opportunity in today’s telecom sector.

On the date of publication, Nikolaos Sismanis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.