Investors who still have their money in telecom stocks most likely have very strong stomachs.

After all, the recent meltdown at



and debt concerns at companies like






have flushed so much cash out of the sector.

For some ideas on how to navigate the turbulent landscape today, we talked to Ivan Arteaga, who has managed Gabelli's telecom fund since 1994. So far this year, Artega's fund is down 34.96%. But it is doing better than 74% of its peers. As a practice, the fund manager avoids telecom equipment stocks in favor of phone service names. And he keeps a focus on valuations and fundamentals in the business.

1. What is the impact of the WorldCom implosion on the rest of telecom?

The WorldCom effect is part of a much bigger issue that cuts across a number of different sectors. It has to do with the confidence investors have in the information they are being given. The issues with telecom are broader than confidence issues. The group has high capital needs. A number of companies in the industry have had problems getting capital, or accumulate more of it than they could pay off.

2. How is it that nobody asked WorldCom the question about how they capitalized their expenses?

We don't know that people didn't ask the question. The details are not really out yet. All we know is that, apparently, WorldCom was capitalizing what they should have been expensing.

Talking With:

Ivan Arteaga
Associate Portfolio Manager, Gabelli Global Telecommunications Fund (GABTX)

Expense ratio:1.52%

1-year return: -44.34%

3-year return:-19.27%

Top holdings: Telephone and Data Systems (TDA), Century Tel (CTL), Commonwealth Telephone Enterprises (CTCO)

Assets: $200 million

3. Let's talk about your fund. It's doing relatively well, but is still down. How are you feeling about it?

The fund is doing well relative to its peers. It's a sector fund, so it can't avoid the updrafts and the downdrafts of the group. It's hard to have absolute returns in an industry where everything is down.

4. What is your strategy? And where in telecom do you think investors should put their money?

We take a bottom-up approach in picking stocks, focusing on industry fundamentals. We compare a company to the industry, and look at it on a stand-alone basis to estimate its intrinsic value.

Regional bells are always good companies, and they are selling at a good price. Some of the foreign incumbents also look good, such as

British Telecom



Telecom Italia


. In wireless,


(VOD) - Get Report

is No. 1 or 2 in just about every market it is in. The stock is trading at a price that implies a valuation that means you can buy the company at less than six times EBITDA

earnings before interest, taxes, depreciation and amortization.

We have not been big long-distance investors. But


(T) - Get Report

offers an interesting spin, because of its deal with



. They also have a pretty good customer base, especially in business services. And you can now buy AT&T -- which should not be compared to WorldCom -- at a very good price.

5. What are some of your telecom fund's top holdings, and can you talk about them?

We have been big holders of

Telephone and Data Systems

(TDA) - Get Report

, which offers local exchange carrier and wireless services in rural markets. They are generally the only game in town in the markets they operate. The company has a very strong consumer loyalty, and its valuation is compelling.

We also own

Century Tel

(CTL) - Get Report

, which has a similar investment case to Telephone and Data Systems. We are also a large holder of

Verizon Communications

(VZ) - Get Report

, which is a good local exchange business.

6. Going back to WorldCom, does the mess make AT&T and Sprint (FON) more attractive or less?

To the extent WorldCom is in trouble, customers may switch service. AT&T and Sprint are almost the only options. For investors, long distance is a tough business. But that may be priced in already.

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7. Will WorldCom customers lose their long-distance service if the company goes bankrupt?

It depends on how the bankruptcy process works out, and whether or not they get financed. I would guess they would continue to operate their flagship product, at least. But you may have an issue with customers switching to providers where they think the risk of losing service is lower.

8. What have been and continue to be some of the trouble spots that remain in telecom?

The trouble spots have been competition -- which affects pricing -- and visibility in demand in some sectors. Other problems have been financial liabilities and balance sheets. Accounting is also in issue.

We will probably see a continuation of bankruptcies in some of the weaker areas -- the smaller CLECs

competitive local exchange carriers. But most public companies have already been affected.

9. Where do you see the biggest potential for improvement?

We will mostly likely see improvement in wireless, where there may be some global consolidation. You could also see consolidation between a large wireless company, such as a

VoiceStream Wireless


or even

AT&T Wireless


, and another carrier.

10. What do you think is the outlook for capital spending? Will it come back anytime soon?

As far as capital spending, we don't see an increase in the next year and a half. It is hard to predict looking further out. There are probably issues that impacted it when it was being fueled by easy money.

In keeping with TSC's editorial policy, Diane Hess doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Hess welcomes your questions and comments, and invites you to send them to

Diane Hess.