June 22, 2018 / 11:04 AM / a year ago

Wall St Week Ahead-Supercharged telecom sector could become investor favorite

 (Repeats item from Friday, June 22; no changes to text)
    By Noel Randewich
    SAN FRANCISCO, June 24 (Reuters) - An overhauled
telecommunications sector featuring most of the so-called FANG
stocks could debut as Wall Street's hottest bet when it kicks
off in September, boosted by a rising wave of media and
television acquisitions. 
    Long viewed as stodgy stocks for dividend-oriented
investors, the telecom services sector will be renamed
communications services and supercharged with the addition of
Facebook, Netflix and Google-owner Alphabet
 - three of the four FANGs, along with Amazon - as well
as other companies that have driven the stock market to record
highs in recent years. 
    The changes are part of the largest-ever shakeup of the
stock market's broad business categories.
    In total, 14 S&P 500 companies, including Netflix, will
shift from the consumer discretionary sector into
communications, joining AT&T, Verizon Communications and
CenturyLink in the biggest shakeup of the Global
Industry Classification Standard, or GICS, since it was created
in 1999. Five S&P 500 companies will switch from technology to
    The new sector will also include Walt Disney,
Comcast and other entertainment and media companies
scrambling to consolidate and fend off competition from
newcomers Netflix and Alphabet, which produce content and sell
it directly to consumers. 
    The floodgates for such deals were sprung open this month by
a legal ruling giving AT&T the go-ahead to buy Time Warner
for $85 billion.
    "Among all of the sector groups, this is going to be the
most dynamic," predicted Jack Ablin, chief investment officer at
Cresset Wealth Advisors in Chicago. "You will see a lot of deal
activity in the coming months, and it will be an awakening for
anyone who is not on top of it."
    Amazon.com, the fourth FANG stock, will stay in
consumer discretionary and represent nearly a third of that
    Classifying companies within 11 major sectors and several
sub-sectors, GICS is closely followed by sector analysts and
investors. Its overhaul, which has yet to be finalized, aims to
reflect the evolution of the media, telecommunications and
Internet industries.
    Getting a head start on the September revamp, State Street
Global Advisors on Tuesday launched here
 the Communication Services Select Sector SPDR Fund,
benchmarked to the sector's future configuration.
    Reflecting Wall Street's willingness to pay top dollar for
companies like Alphabet, Netflix and Activision Blizzard
, the newly constituted communications sector would
trade at 19 times expected earnings, nearly double the sector's
current multiple, according to Thomson Reuters I/B/E/S. 
    Earnings of the newly constituted communications sector are
expected to jump 23 percent in the final quarter of 2018,
compared with an estimated 12 percent increase under the
sector's current configuration.
    Over the past five years, the telecommunications sector has
had a total return of just 16 percent, including dividends.
Under its new configuration, it would have had a total return of
110 percent and outperformed the S&P 500's 85 percent return,
according to Credit Suisse equity strategist Patrick Palfrey.
    Media, television and wireless companies, all of which will
become part of the Communications sector, see buying content
producers as a way to add revenue. 
    Twenty-First Century Fox has surged 20 percent
since June 13, when Comcast offered $65 billion for its media
assets, outbidding an offer from Walt Disney, which responded on
Tuesday by raising its bid to $71 billion.
    Sprint, T-Mobile, Viacom, CBS
, Dish Network and Discovery have
risen between 6 percent and 34 percent in June.
    Even if M&A speculation subsides before the GICS changes
take effect, the addition of most of the FANGs and several other
high-growth former tech stocks will make the communications
sector attractive, said Michael James, managing director of
equity trading at Wedbush Securities in Los Angeles.  
    "Interest in the sector and the individual names is not
going to dissipate," James said.

 (Reporting by Noel Randewich; Editing by Alden Bentley and Dan
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