investors, 2010 is looking good.
That is at least part of the thesis offered by Goldman Sachs analyst Jason Armstrong, who upgraded both stocks to a buy Friday.
AT&T and Verizon's stocks rose 2% in midday trading Friday amid a widespread selloff of the Dow.
With AT&T and Verizon down about 18% so far this year, Armstrong says the "pendulum has swung too far" and that it's time to consider the long-range perspective. In a research note Friday, Armstrong recommends buying shares of the two telco titans now, while pessimism about the economy is weighing so heavily on the market.
Why now? Armstrong has three points: The bar has been lowered in terms of Wall Street expectations, both telcos have "an achievable path to growth in 2010," and both offer a big, safe dividend -- about 7% annual payout -- to help you bide your time.
Some telecom investors were happy about Goldman's courageous call.
"It's the right call down here, and it's amazing that someone made it," says one New York-based money manager who owns both stocks.
To be sure, it is a bold call, requiring investors to look beyond 2009 and the dreary effects of the recession, growing unemployment and a lingering banking crisis.
AT&T and Verizon face stunted revenue growth, heavy debts, steeper than anticipated phone line disconnections and soaring costs associated with video expansion and phone subsidies to lure wireless subscribers.
Both companies shared updates on their businesses earlier this month with their fourth-quarter results. Verizon, citing uncertainty, declined to provide any forecast for the first quarter. "Visibility into 2009 is less clear than we have seen in previous years," CEO Ivan Seidenberg said. That not-so-confident stance was further undercut a week later with Verizon CFO Doreen Tobin's surprise announcement that she plans to retire by mid-year.
For its part, AT&T offered a forecast calling for continued growth in 2009 but provided no specifics. The one solid detail in Ma Bell's outlook was a call to cut about $2.5 billion from its spending plan.
Armstrong's assessment factors in several risks to the sunny 2010 scenario, and his price targets for the two stocks isn't exactly off the charts. He's calling for AT&T to reach $30 in the next 12 months and Verizon to hit $33. Those targets represent a 25% increase for AT&T and a 15% rise for Verizon, based on Friday's stock price.
As for risks, Armstrong cites a few key factors. One is the ongoing labor negotiations at AT&T's wireless shop. Another is the chance that one of the telcos will try to take over a satellite TV player like
Dish Network to broaden its video offerings. And there's also the possibility that the stock market could rebound, causing investors to shun safe dividend strategies in favor of growth stocks.
The Goldman call comes a day after
reported that it lost 4.5 million wireless subscribers last year and now threatens to intensify an industry price war in a bid to turn its business around.
With the Dow Jones Index hitting a six-year low Friday, Goldman's bottom call on Verizon and AT&T could be the beginning of an analyst trend calling for stocks to go up from here. But given that we may still be early in the economic slide, there could be many new bottoms to come.