Telcos Tremble as Views Cool on Wall Street

A wave of downgrades splashed cold water on steamy telecom stocks Friday.

Signaling some discomfort with AT&T's (T Quote) two-month, 57% rise, analysts at Goldman Sachs and Jefferies cautioned that Ma Bell's recent buoyancy ignores the company's sinking business outlook.

And while other stock watchers issued similar warnings about the regional Bell operating companies, one notable former bear turned positive.

The moves come in the midst of a sweet spring for tech stocks, as shares have marched higher despite persistent warnings from bearish observers that the fundamentals are being left behind.

Self-Fulfillment

On Friday, Goldman analyst Frank Governali reaffirmed his AT&T rating at neutral, while Jefferies' Rich Klugman slapped a sell rating on the stock. Klugman in particular took issue with the market's surging enthusiasm, noting that the fundamentals in the telecom industry remain soft.

"Because the stock is up, things must be good," he says by way of lampooning blindly bullish investors. "Well, they aren't."

Wall Street's recent tech affections have seemingly ignored the uglier realities of an eroding business, whose price wars and customer declines continue to hobble big, widely held players. And as the gap between investor sentiment and business reality gets wider, more analysts are finding reason to ring the warning bells.

Klugman downgraded AT&T after it rose beyond his $18 price target. Similarly, Governali cited AT&T's price-to-earnings ratio of 14 for 2004, which he says undeservedly puts it in league with the slightly more solid Bells.

T With Honey AT&T's two-month rally

Thomas Weisel analyst Ned Zachar, meanwhile, issued downgrades on regional Bell companies Verizon (VZ Quote), which he cut to neutral, and BellSouth (BLS Quote), which he cut to sell. In making those moves Friday, Zachar cited a recent run-up in the stocks and an absence of improvements on the sales and profits front.