Goldman Sachs upgrades stumbling Verizon and Charter shares: 'The pipes are not broken'

Pedestrians walk by a Verizon Wireless store on January 22, 2015 in San Francisco, California.
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Pedestrians walk by a Verizon Wireless store on January 22, 2015 in San Francisco, California.

Goldman Sachs upgraded Verizon and Charter Communications to buy from neutral, believing the broadband providers have been unfairly punished as other telecommunications giants pursue costly acquisitions.

"We believe that broad underperformance across the sector has been driven by a few key factors, including concerns about fundamental headwinds, M&A uncertainty and rising interest rates," the Goldman note stated. "At a higher level, we believe the pursuit of vertically integrated business models (via levered M&A) by some operators has caused investors to question whether large cap stocks in the telecom and cable sector can outperform while the industry is undergoing such significant transformation."

Verizon and Charter are down 9 percent and 14 percent respectively this year amid a judge's approval of AT&T's blockbuster deal for Time Warner and a bidding war for certain Twenty-First Century Fox assets between Disney and Comcast.

Comcast and AT&T stocks are both down 17 percent this year.

"The pipes are not broken," the Goldman note goes on to say. The two companies "are positioned as long-term leaders in broadband and 5G. Put another way, we believe that both operators can drive attractive long-term shareholder returns by sustaining their core focus on connectivity (i.e. building strong pipes)."

Goldman increased its Verizon 12-month price target to $56 from $51 and its Charter target to $361 from $315. Verizon closed Wednesday at $48.09, and Charter ended the day at $290.34.

Verizon rose 1.3 percent in premarket trading Thursday, while Charter gained 1.9 percent.

— With reporting by Michael Bloom.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.