Make Money by Not Owning Telecom

Forget the debate over whether telecom is a buy or sell. Make money being indifferent.

The decisions by Verizon (VZ - commentary - Cramer's Take) and AT&T (T - commentary - Cramer's Take) to offer unlimited wireless plans for $100 has launched a furious debate at RealMoney over whether the move is the right thing or the wrong thing to do.

I see both sides of the story, and if anything, I lean toward the side of the bulls. But while the bulls and bears hash things out, I believe investors can make money by being neutral.

To sum up the arguments, on the bearish side, Tero Kuittinen says, "The AT&T and Verizon growth stories rest largely on their mobile service, and the mobile service growth hinges on mobile data, not voice. Investors are going to be deeply disappointed if Verizon's mobile data growth keeps cooling down from the still-torrid 53% pace of the fourth quarter of 2007. For Verizon, mobile data revenue still generates just $11 a month out of the overall $51 average revenue per user. The data growth has to continue to run hot, or the overall ARPU will start declining."

Jim Cramer counters that "the stock can trade back up toward the high $30s over the coming quarters as the market comes to realize that these wireless price cuts are a savvy move to take market share from Sprint Nextel (S - commentary - Cramer's Take), which appears to be in serious trouble."

In the short term, I'm making absolutely no forecast about the effects of the wireless pricing cut, the effects of a potential recession or the stock price. But there are a few facts to consider that explain my lean toward the bull side.

First, this isn't the first time in recent memory that there has been a competitive telecom environment. Since the 1996 telecom act, everybody from CLECs to independent wireless operators to cable and long-distance companies has taken their shots at the big integrated telecom firms. Several of those categories of competitors no longer exist in any meaningful fashion. So, while it's true that the pricing power in telecom may not remain at the high levels enjoyed of late, a competitive environment is nothing these companies haven't seen before.

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At the time of publication, Trent has written put options against the shares of Verizon, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.