Editor's Note: Cody Willard's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published April 16 on RealMoney.
I've often delineated my bullish case for the telecom sector, but something (hmm, maybe my email?) tells me that I need to be more careful about citing caution. Though I've warned several times that more
pain lies ahead for many areas of telecom, it seems that many clients and readers often miss that very important point and paint me as an out-and-out bull.
There's a reason why I've opened only a dozen or so positions in
The Telecom Connection
newsletter: Not many stocks are worthy of our hard-earned capital. Let me be perfectly clear: I'm not an out-and-out bull. I find some very compelling buying opportunities here as some companies' fundamentals are stabilizing -- or shall I say it? -- even improving, while their stocks don't yet reflect such a trend.
Far from being a raging bull, I was nearly run out of a Voice-Over-IP conference called VON last week in Seattle after sitting on a panel and bluntly speaking the not so optimistic truth. My panel-mates and conference attendees were busily convincing one another that a turn is just around the corner for VoIP prospects, which have been just awful lately. On the other hand, I'm convinced that nearly all of the current crop of VoIP vendors will disappear in the next year and a half.
The problem isn't the technology, which, frankly, is great and will shift paradigms for most everyone in the teleconomy. The problem is that the only companies buying such equipment are the start-up service providers. Yes, those are the same start-up service providers that dominate the bankruptcy news and that will never again see any material access to capital.
Essentially, investors need to focus on companies that have nothing --
-- to do with the start-up service provider world. Companies like
still have way too much exposure to these weak companies and should be sold.
Of course, balance sheets are of the utmost importance, too, and that factor has kept me away from
. And, obviously, valuations are still key. Lofty double-digit price-to-sales ratios prevent me from looking at most of the component suppliers like
Applied Micro Circuits
Seeking Some Winners
So how about a few companies with relatively clean balance sheets, strong sales channels away from start-up service providers and low valuations? Well, I'm still long
, which will report earnings next Monday and should have a strong quarter. I expect it to follow through on its guidance of reaching
EBITDA-positive Promised Land, and it's still touting nine figures in cash on its balance sheets with no debt.
I'm still long
Advanced Fibre Communications
, which has a long-standing dominant position with smaller and rural incumbent local exchange carriers across the country. Sources also tell me that the company is gaining traction among the larger regional Bell operating companies.
I like several operators, too -- specifically, those that will benefit from the collapse of the start-ups. These include
So call me what you will: bull, bear or something in between. (Just please don't call me late to dinner!) The point is that I see big opportunities to the long side for investors who proceed to invest in the teleconomy with caution.
Cody Willard is a telecom and financial analyst/consultant. He is also founder of
TelEconomics.com. Willard has co-managed $150 million in private investment funds and has headed up the research and analysis division of a venture development company. He has founded several telecom and technology companies and has managed the wholesale division of a $100 million CLEC. At time of publication, Willard was long ITXC, Advanced Fibre Communications, Verizon, SBC and Comcast, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to