The market has been choppy in 2018. It started off hot, cooled off, rebounded, etc., and is only now posting steady gains. But not all stocks have followed the market’s choppiness so far in 2018. Telecom giant AT&T Inc. (NYSE:T) didn’t get that red-hot start to the year, and hasn’t rebounded. Instead, AT&T stock has steadily dropped over the past several months, and is now down 17% year-to-date.
Sub-par earnings reports are mostly to blame. As are regulatory concerns and increased competition.
But at current levels, AT&T stock is priced as if the fundamentals are awful. And they aren’t awful. If anything, they are roughly in-line with historical fundamentals.
As such, recent weakness in AT&T stock isn’t driven by a deterioration in fundamentals. Rather, it is sentiment-driven. Eventually, that sentiment will flip, and the stock will bounce back. That is why I’m a buyer on this dip.
Here’s a deeper look:
The Bullish Technical Backdrop
The technicals imply that AT&T stock has entered materially undervalued territory and is due for a bounce-back in the near future.
AT&T has dropped down to $32. It has dropped down to that level only three times before over the past five years. Each time, the stock didn’t hang out at $32 for long, and proceeded to rebound to above $36 within months.
Moreover, AT&T stock is now trading roughly 6% below its 50-day moving average of $34. Low-volatility stock AT&T almost never trades that far below its 50-day moving average. But when it does, it usually snaps back to the 50-day moving average rather quickly.
The same is true as it relates to the 200-day moving average, which sits at $36. AT&T stock is 10% below that level. That 10% spread is essentially the widest that divergence has been over the past five years. Other divergences near this magnitude usually corrected themselves rather quickly.
On a more fundamental basis, the dividend yield is now above 6%. That is a five-year high, and markedly above the 5-year average dividend yield of 5%. Historically speaking, when the yield is above 5.5%, AT&T is near or at a bottom.
Lastly, the forward earnings multiple is just 9.5, versus a 5-year average forward earnings multiple of nearly 13.
Fundamentals Aren’t Awful
Based on the current stock price, dividend yield, and valuation, you would assume that the fundamentals supporting AT&T stock are awful.
But they aren’t.
Granted, the company is getting killed in the wireline and video businesses by cord-cutting. The recently proposed merger of Sprint Corp (NYSE:S) and T-Mobile Us Inc (NASDAQ:TMUS) provides an enhanced competitive risk on the wireless front. And AT&T’s proposed acquisition of Time Warner Inc (NYSE:TWX) has come under intense regulatory scrutiny.
But there are also some strong catalysts in the AT&T pipeline.
Cord-cutting headwinds are largely being offset by increased adoption of DirecTV Now, the company’s over-the-top solution. As a result of DirecTV Now’s success, AT&T is reinventing its video business to be more relevant in today’s over-the-top dominated media world, and that should create growth tailwinds for the wireline and video businesses.
On the wireless side, AT&T has two huge catalysts in front of it: 5G and the Internet-of-Things (IoT). Mass-market roll-out of 5G will enable AT&T to once again differentiate itself in the wireless service market, thus resulting in bigger growth and higher margins.
Meanwhile, the mainstream emergence of IoT means more devices than ever need wireless coverage, thus amplifying demand for AT&T’s services.
Overall, then, the growth narrative supporting AT&T stock isn’t all that bad. If anything, it is presently troubled, but should improve dramatically over the next several years thanks to DirecTV Now, 5G, and IoT.
Bottom Line on AT&T Stock
The current price tag on AT&T stock only makes sense if the company is in hot water. But AT&T isn’t in hot water. Consequently, recent weakness is an opportunity to snap up shares at a discount.
As of this writing, Luke Lango was long T and TMUS.
