Go long in 1991. Stocks of long-distance telephone carriers have risen better than 30 percent in value this year, while the once-dependable regional carriers have fallen 25 percent.
A steadfast belief that cutthroat long-distance price competition has finally ended and that an improving economy will help matters even more is behind the long-distance resurgence.
Meanwhile, persistent concerns about competition, cellular acquisitions here and abroad, and pending rate cases have bedeviled the regionals. It's true that regional firms are gaining new powers, such as the ability to provide home information services, thanks to a recent court ruling. But whether all this opportunity will help their bottom line remains to be seen.
"Long-distance carriers have backed off their constant telemarketing because they realized they were just churning customers between each other," said Greg Sawers, telecommunications analyst with Sanford C. Bernstein & Co. "Prices charged for long-distance service may have actually increased over the past three months."
Investors are banking on the economy.
"The long-distance business is cyclical, and, while unit growth hasn't rebounded yet, there has certainly been strong anticipation of unit growth by investors," observed Craig Ellis, telecommunications analyst with C.J. Lawrence, Morgan Grenfell.
In long-distance, American Telephone & Telegraph is a favorite stock of both Sawers and Ellis. AT&T's market share, which eroded from 90 percent in 1985 to 62.1 percent in 1990, actually improved to 63.1 percent this year. Its $4 billion restructuring should provide earnings gains long-term, though the impact of its ambitious acquisition of NCR Corp. will take awhile to become clear. Near-term AT&T earnings just might turn out better than initial estimates.
Sawers also likes MCI Communications, which he considers a well-managed company.
The regional telephone companies have their own set of woes.
"Earnings for the regionals are becoming less and less predictable as they diversify and gain new powers," explained Ellis.
Among regionals, Sawers favors U.S. West because its stock is valued 15 percent below the rest of the group.
Nynex Corp. is the favorite regional of Ellis, once again because its stock is undervalued compared with other baby Bells. The company experienced troubles due to economic woes of its New York service area in 1988, but it has made significant improvements in its operations.
In cellular companies, a bright group in terms of price appreciation this year, Ellis recommends LIN Broadcasting. Its cellular operations in New York, Los Angeles, Dallas and Houston are impressive. A higher-risk choice is Metro Mobile, with cellular assets in Connecticut, Arizona and New Mexico. It could be bought out by a large telephone company.
Communications equipment is another growth area.
Among communications equipment stocks, Levy recommends two teleconferencing companies. They are PictureTel Corp., the leading manufacturer of video conferencing systems, whose stock has already risen 100 percent this year, and ConferTech International, largest maker of audio conferencing bridge equipment. He also likes Octel Communications, a high-quality company in voice messaging, and Tellabs Inc., a firm whose new digital connecting system for telephone companies looks promising.