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Telecommunication Services
| The Telecommunications Services Sector contains companies that provide communications services primarily through a fixed-line, cellular, wireless, high bandwidth and/or fiber optic cable network. |
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Actual market weightings for each sector are based on the S&P 1500.
**The Market Analysis, Research and Education (MARE) group is a unit of Fidelity Management & Research LLC.
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Sector Commentary from Standard & Poor's
11/15/2009
S&P recommends underweighting the S&P 500 Telecommunication Services sector. Year to date through October 23, this sector index, which represented 3.0% of the S&P 500 Index, was down 7.7%, compared to a 19.5% increase for the S&P 500. In 2008, this sector index fell 33.6%, versus a 38.5% decline for the 500. There are two sub-industry indices in this sector, with Integrated Telecommunication Services being the largest, at 90.7% of the sector's market value.
S&P analysts have a positive fundamental outlook for the sector, based on a positive outlook for the Integrated Telecommunication Services sub-industry, which makes up the vast majority of the sector's market capitalization. While we expect major telcos to face challenges as the economy slows, we see the carriers generating free cash flow from broadband growth and cost savings, supporting dividends and share repurchases. S&P equity analysts forecast 2% EPS growth for the Telecom sector for 2010. The sector trades at a P/E on estimated 2010 earnings of 12.8X, below the 14.6X of the S&P 500, and its P/E-to-projected-five-year EPS growth rate (PEG) ratio of 2.3X is above the market's PEG ratio of 1.5X. Lastly, this sector's marketweighted STARS average of 4.6 (out of 5.0) is above the S&P 500 Index average of 3.7.
The S&P GICS Telecom Index continues to underperform the overall market as it works on a base that has been in place since October. Prices are still below the top of the base up near the 115 to 118 zone, so, in our view, it will take some more time for the sector to complete a bullish reversal formation. Prices are back below both the 17-week and 43-week exponential averages and have remained below the 43-week average since December 2007. Both averages are basically flat, and it will take a push higher in prices to get a moving average crossover buy signal, in our view. Relative strength versus the S&P 500 remains in a downtrend after peaking in early March, and the RS line is at its weakest point since January 2006. Weekly price momentum has only recovered to neutral territory, much weaker than many other sectors. Our technical view on Telecom remains bearish.
In conclusion, we recommend underweighting the Telecom sector, as we believe a relatively muted profit outlook will result in underperformance as investors focus on more economically sensitive sectors.