Telecommunications, the best performing sector in the first half of the year, surged on Monday to trade at levels unseen since June 2008. Although Verizon Communicationsand AT&T are the biggest players in the sector, they may not be the best bet for investors.
Christopher King, Stifel Nicolaus telecom and cable services analyst, expects telecom to remain a top performing sector in the second half of 2012. “Telecom is very well positioned, particularly in a defensive market,” he said.
King said that investors have become increasingly more engaged with the sector over the past six months because it is a safe-haven in a choppy, volatile market. “A lot of investors are looking for those free cash-flow yields and dividend yields that the larger Bells are spinning out,” he told CNBC’s “Power Lunch.”
Although Verizon is trading at a premium to AT&T, King continues to prefer Verizon.
King said that Verizon Wireless’ deals with the cable companies and their joint marketing agreements are an advantage for the stock. He explained that Verizon will become even more dominant if it is able to gain exclusive access to cable’s wifi hotspots in the future. “I think that could be a differentiating factor for Verizon Wireless over the next six to 12 months,” King said.
While Verizon and AT&T continue to dominate the sector, some analysts are warning investors to proceed with caution.
Matt Cheslock of Virtu Financial is cautious on Verizon and AT&T as they reach multiyear highs. He predicts that they will enter bidding wars on the services that they provide.
Both Cheslock and King have turned their attention to Sprint Nextelinstead.
Sprint, down more than 50 percent in the last couple of years, rose nearly 18 percent over the past three months. “I do like Sprint here, although it is a little bit more volatile,” Cheslock of Virtu Financial said.
“They have, in our view, taken bankruptcy off the table for the next several years at least,” King of Stifel Nicolaus said. “So that’s helped buoy the stock.”
King said Sprint’s recent internal restructuring is a source of investor hope. The changes involve a multiyear process of consolidating Sprint’s various wireless networks into one or two larger networks. These changes will likely improve margins for the stock over the next few years, he said.
Cheslock also predicts that the stock will see a positive boost after the release of Sprint’s new LTE platform in two weeks. “I think they’re going to catch their brethren,” he said. “I think Sprint is probably a better play.”
—By CNBC.com’s Madeline Laskoski
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Stifel, Nicolaus makes a market in the securities of AT&T and Verizon Communications. Christopher King does not personally own shares in AT&T, Verizon, or Sprint.