Telecommunication stocks are leading the S&P 500 so far today.
Vanguard Telecommunication Services (VOX) has risen 2.6%, iShares U.S. Telecommunications (IYZ) has climbed 1.4%, and iShares Global Telecom (IXP) has notched a near 2% gain. However, the sector has been the second-worst performing in the S&P — only behind energy — year-to-date.
Carrier stocks, specifically, have been poor performers in the past three years due to competition and stringent regulations. “We attribute the two biggest headwinds to equity performance being pricing competition (T-Mobile gained share) and adverse regulatory environment, preventing healthy mergers and also creating costs pressures via net neutrality,” wrote Fundstrat‘s Thomas Lee.
Lee says that if the FCC reverses Title II — net neutrality rules put in place in 2015 — cable and telecommunication companies stand to gain as the industry consolidates. He wrote:
The wireless industry, in particular, is overly competitive today—one only has to see the brutal price competition to realize limited consolidation down to only 4 carriers creates adverse industry structure. The problem, ultimately, is wireless carriers face platform competition (subscriber loyalty shifting to AAPL, etc) and improving technologies (higher speed, plus MVNOs) mean carriers are competing with cable. Hence, over the next 12-24 months, a Trump-led, industry friendly, Washington (and FCC and Dept. of Justice) likely results in wireless consolidation (S/TMUS merger, shrinking industry from 4 to 3) and possibly a cable/wireless merger.
Lee thinks that AT&T (T) and Verizon (VZ) could surge as much as 40% in the next year, which would still make them cheaper than electric utility stocks. Though Fundstrat’s technical analyst Robert Sluymer suggests buying Charter Communications (CHTR), T-Mobile US (TMUS), and Sprint (S) first and waiting for support levels to signal a buy for AT&T, Verizon, and Dish Network (DISH).
What could derail this thesis? Internet companies have opposed Title II revocation and their collective market power could “wield influence” with customers, says Lee.