BOSTON (TheStreet) -- Apple (AAPL) - Get Apple Inc. (AAPL) Report is the wireless darling of Wall Street, as the iPhone and iPad maker has rewarded investors with a 53% increase in its share price in the past year amid record earnings and revenue.
Many other wireless-related stocks, from handset makers like
Research In Motion
to service providers such as
, are unloved by investors because they've underperformed the market for years. But their time may finally have come.
is up 3% this year, while Spain's
has rallied nearly 10%,
has climbed 8%, Research in Motion is up almost 7% and
has added more than 6%.
Wall Street may just be waking up to a sector that has notched a woeful performance over the past several years, but fund managers have been trumpeting telecom as an undervalued sector that pays hefty dividends -- typically a characteristic of mature companies -- while also offering growth thanks to the explosion of mobile Internet.
Cliff Remily, manager of the
Thornburg Investment Income Builder Fund
is overweight the telecom sector, citing the huge wave of data services and smartphone penetration that he believes is just beginning.
"Seeing the magnitude as it develops is amazing," Remily says from his office in Santa Fe. "It's not just the U.S. We have stocks in Thailand, Singapore, Korea, Australia. This is around the world. Frankly, it's fun to watch the fundamentals develop and percolate. It's fun to see the beginning because investors don't believe it yet."
One of the key reasons investors aren't believers is due to the lagging performance of many telecom names. Over the past five years, as the S&P 500 has lost 0.7%, the
iShares Dow Jones U.S. Telecom ETF
has fallen 11%. In the past decade, the ETF has dropped 35%, compared to a 14% gain on the S&P 500.
Investors are also keenly aware of how fickle consumers can be with their choice of wireless companies.
at one time was among the top personal-device companies before being swallowed up by
was once the world's hottest cell-phone maker but the stock has lost half its value in the past year. Wireless providers like AT&T have ranked low in customer satisfaction due to reception problems, dropped calls, poor customer service and increasing bills.
The sector was jolted earlier this week after
announced a $39 billion deal to acquire
. Potential regulatory scrutiny makes it tough for fund managers to judge whether AT&T is a good stock pick now.
But AT&T isn't the only name in the sector.
spoke to four fund managers with exposure to wireless stocks, from chipmakers to handset manufacturers to service providers, for their best picks for a sector rebound.
Cliff Remily, manager of the Thornburg Investment Income Builder Fund
With $8.4 billion in the
Thornburg Investment Income Builder
, Remily is making a big bet on telecom-related stocks. While the S&P 500 index weight for telecom is close to 6%, Remily has 22% in the sector.
"We're making a large bet here but we're comfortable with it," Remily says. "We see an undervalued, unloved sector that has underperformed for the last couple years. I sleep well at night with it."
It's no wonder. The fund's goal is to buy equities that can grow dividends every year to protect against inflation, with the expectation that capital appreciation will follow. He says the average yield of his telecom investments is 6.5%, nearly double the yield on the 10-year U.S. Treasury bond.
But yield is only one positive aspect of telecom stocks in Remily's eyes. Data is the next leg of growth for telecom providers, as voice has become mature with average revenue per user flat. "Now you're getting growth and dividends, which is a pretty interesting story," he says.
Remily says investors need to be selective, though. He argues that U.S. telecom stocks like
are expensive, and that he owns
in the fund for access to Verizon Wireless in the U.S. Like many investors in Vodafone, Remily is quick to note the nearly 5% yield on the stock as well as the 45% stake in Verizon Wireless, which is expected to result in a separate dividend at the end of this year.
Remily is also a big fan of other American Depositary Receipts, or ADRs, of foreign wireless companies. The fund has stakes in names like
. Telstra, for example, is yielding more than 10%.
Channing Smith, manager of Capital Growth Advisors Fund
Capital Growth Advisors
looks beyond telecom providers as big believers in the mass adoption of mobile Internet.
The fund, with about $23 million in assets, owns service names like
, chipmakers like
, and software and handset makers like
Smith says investors looking to play the mobile technology space ought to own a basket of stocks with dominant designs. And like Remily, Smith notes how truly global the mobile Internet trend is and how powerful it can be.
"With the mobile Internet, the technology is very simple and easy to hook into," Smith says. "That's why you're seeing this explosion in countries like China, India and Brazil. The infrastructure is much easier to set up in emerging countries like India and China. They now have access to this technology at a very attractive price point."
The search for growth requires investors to abandon blue-chip tech stocks like
as they have now become dividend stocks for value investors. "They've lost appeal to growth investors. You want to go where the action is, and that's mobile Internet," he says.
Smith is hard-pressed to find anything with better growth opportunities than Apple and Google, noting that
Research In Motion
-- which is out with earnings later Thursday -- has missed out on apps, which are truly more important to consumers than corporate email.
For more conservative investors, Smith recommends stable earners such as AT&T and Vodafone, noting the attractive dividend yields and stable businesses. As an AT&T shareholder, Smith says he likes the $39 billion offer for T-Mobile USA.
"It gives them access to 34 million more subscribers. It also enhances their network," Smith says. "It will help upgrade their network and increase their coverage. It will also create enormous synergies. They'll be able to close retail locations and call centers. They'll be able to create some value that way."
James Dailey, manager of the TEAM Asset Strategy Fund
Not every fund manager is quickly jumping into every wireless name.
Dailey, with $200 million in assets under management at his firm and $53 million in his mutual fund, previously turned to the telecom sector as part of his portfolio construction in order to play the mobile Internet space, buying names like
Now, though, Dailey has exited those positions in hopes of buying them again 10% to 15% lower from where they trade now. "There's nothing horrible to the long-term growth picture," he says. "We just see better opportunities elsewhere."
Elsewhere for Dailey has been
While valuation has been an issue with Verizon and the T-Mobile acquisition creates uncertainty for AT&T, Dailey says the recent market dive has made "some very cheap blue chips with better growth profiles cheaper than telecoms."
Dailey's contrarian strategy has him preferring a stock like
, which is down more than 45% over the past year as the handset maker has struggled against touch-screen smartphone makers like
Dailey says he is worried about a growing risk of a major inventory problem for smartphone and tablet makers, all the way through the supply chain to even the chipmakers.
"All of these companies have been ramping up and there will probably be a supply glut even if things are OK," Dailey says. "With inflation and wage issues, weakness on the part of the consumer raises the potential for demand not being strong with all of this supply coming in."
For that reason, Dailey says investors looking to play the space should instead look at turnaround candidates like Nokia, a stock that isn't priced optimistically like Apple.
"Nokia has had nothing but bad news that eventually something could go right," he says. "If it doesn't, you have a decent margin of safety. The stock is so cheap it's obscene. It could be the next Palm, but it is still priced at a margin of safety."
Steven Roge, portfolio manager at R.W. Roge & Co.
Roge, who helps manage the
Roge Partners Fund
, doesn't own
but he's done plenty of analysis on the stock. He says he's never seen a stock in the limelight more that "is so grossly undervalued."
"It's probably worth about $475 a share," Roge says. That would imply upside of 40% from where Apple shares currently trade, which is already near the stock's all-time high. While some investors have balked at the $340 share price Apple currently touts, Roge says the naysayers have it wrong.
"A lot of investors are being contrarian for contrarian's sake," Roge says. "If you strip away all the headlines and glamour and you look at the prospects and valuation, Apple has a lot more room to run."
Bohemia, N.Y.-based R.W. Roge & Co., which has about $220 million in assets under management, looks at both value and growth stocks. Roge says Apple fits the bill because of the amount of cash on the balance sheet, free cash flow ability and great earnings visibility.
"It's below-market multiples and you're getting a company with a better growth and profitability profile than the market," Roge says of Apple. "It really is a unique situation."
With the industry in flux and the glut of mobile tablet devices about to drown the market, Roge says many of these tablet makers and handset makers are still trying to catch up to Apple. "It almost seems like most companies have just given up trying to surpass Apple in creativity," he adds.
Apple is one of the only ways Roge wants to play the telecom sector, as he says he is concerned about the rapidly changing technology of the wireless companies and the costs associated.
"The space is too competitive for any one provider to get a leg up on any other one," Roge laments. "Every time we hear that upgrades are over and that these companies don't have to spend more on capital expenditures and can generate their free cash flows. But then six months later, they're revamping their whole system again. I think I'll pass."
While he says he would buy Apple here, Roge commiserates with those investors looking to get exposure to the wireless space. He does offer those investors some advice.
"The sector changes pretty fast and the dynamics are always moving," he says. "Unless you're an expert in the field, go with a good sector fund or, better yet, a diversified fund with exposure to the wireless market."
-- Written by Robert Holmes in Boston
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