With reasonable valuations, and the possibility of steady returns via high dividends, telecom stocks can be very appealing to investors. Yet while you may be interested in adding names from this sector to your portfolio (especially during today’s high market volatility), there are plenty of telecom stocks to sell and/or avoid.
Most of these telecom stocks fall into three categories. First, there are the value traps. On paper, these types of telecom stocks may look like deep value, but in practice often result in horrendous returns, due to worsening fundamentals. Second, related to the first category, are the yield traps.
Besides trading at super-low valuations, many value-trap telecom stocks also offer relatively high dividend yields. However, in many cases, these yields are unsustainable. It’s not uncommon for telecom yield traps to be one dividend cut away from experiencing a sharp price plunge.
Third, are the questionable growth/turnaround stories. While they offer a high potential upside, whether they have a shot of reaching this potential is up for debate.
Whether value traps, yield traps, or busted growth/turnaround stories, you should avoid these seven telecom stocks to sell:
|Cogent Communications Holdings
|Consolidated Communications Holdings
|Shenandoah Telecommunications Co.
|Zoom Video Communications
AST SpaceMobile (ASTS)
Since going public via a special purpose acquisition company (SPAC) merger in 2021, AST SpaceMobile (NASDAQ:ASTS) has been fairly resilient during the SPAC stock sell-off that’s occurred over the past eighteen months.
In fact, shares in this space-based mobile telecommunications briefly went “to the moon” in August, due to excitement surrounding the launch of its BlueWalker3 satellite. Since then, however, ASTS stock has given back these gains, to some extent due to a “short report” from Kerrisdale Capital laying out the bear case.
Kerrisdale’s report cites several reasons as to why the firm has shorted this stock. These include skepticism about the capabilities of its technology, growing competitive threats, and the high likelihood of shareholder dilution, as AST SpaceMobile needs to raise billions more in capital in order to make its service fully operational. As these risks could send ASTS considerably lower, if you own it, cash out now.
BCE Inc. (BCE)
The parent company of Bell Canada, BCE Inc. (NYSE:BCE) once held a monopoly on phone service in its home market. While it’s been decades since BCE has held this edge, it remains highly profitable and has diversified into other areas like TV and radio broadcasting.
Much like its U.S. counterparts, what interests investors most about BCE is the stock’s high dividend yield. At today’s prices, BCE stock has a forward dividend yield of around 6.75%. However, even as this provides the potential for steady income, high downside risk more than counters this positive.
Rising interest rates have already lessened the appeal of its dividend payout, pushing shares 20.5% lower year-to-date. If rates keep rising, further declines could occur. Not only that, there’s a good chance BCE will eventually have to cut its dividend (which currently exceeds earnings), due to limited growth and a highly-levered balance sheet.
Cogent Communications Holdings (CCOI)
Cogent Communications Holdings (NASDAQ:CCOI) provides internet and private network services to businesses. Many investors are interested in the stock, for both its high dividend yield (7.32%), as well as the potential from its pending deal to buy T-Mobile’s (NASDAQ:TMUS) wireline business.
According to Reuters, this deal will give Cogent its own long-haul network. This eliminates the company’s need to lease a network and could enable it to expand its offerings. Yet while on the surface there’s a lot to like about CCOI stock, a deeper look signals that it’s one of the telecom stocks to sell.
With a 362.37% dividend payout ratio, yield trap risk runs high with CCOI. The company is essentially paying out all of its operating cash flow as dividends. A dividend cut and/or a lack of operational improvements resulting from the T-Mobile wireline deal could send the stock considerably lower.
Consolidated Communications Holdings (CNSL)
Although a legacy phone company, Consolidated Communications Holdings (NASDAQ:CNSL) isn’t undervalued, nor does it offer a high yield. The company currently reports negative earnings and does not pay a dividend.
What has made some investors bullish on CNSL stock, however, is its fiber catalyst. Consolidated has sold off over $600 million in non-core assets this year, with plans to use the proceeds to finance the expansion of its Fidium Fiber business. Nevertheless, while CNSL needs to make this fiber pivot, it’s highly uncertain whether this will translate into materially stronger operating results in a few years’ time.
CNSL has fallen by nearly 45% year-to-date. It could continue to drop, as the market continues to discount its future potential. At some point, Consolidated Communications could become a bargain, but that time has not yet arrived. Sell/avoid this stock for now, and wait for a more worthwhile entry price.
Shenandoah Telecommunications Co. (SHEN)
Better known as Shentel to its customers, Shenandoah Telecommunications Co. (NASDAQ:SHEN) provides cable, internet, and phone service to rural communities in six U.S. states. In contrast to other incumbent telecom companies, Shentel has for years traded at a premium valuation.
SHEN stock took off in the late 2010s. However, since 2021, when Shentel sold its wireless business, and paid out an $18.75 per share special dividend, the stock has fallen by around 50%. Despite this drop, SHEN remains pricey compared to peers, on an enterprise value/EBITDA (or EV/EBITDA) basis.
The stock currently trades at an EV/EBITDA ratio of around 14, compared to 6.5 for similar names like Telephone and Data Systems (NYSE:TDS). Although it owns more highly-valued assets like cell towers, which could justify a premium valuation, this valuation spread could continue to narrow, making this stock a sell.
AT&T (NYSE:T) over the past five years has been a prime example of a yield trap. The stock’s continued decline in price has more than countered the dividends received by long-time shareholders.
After sliding in price during 2021, due to the company’s plans to cut its dividend, in conjunction with the spinoff of its WarnerMedia segment, T stock appeared as if it had found a floor in the low $20s per share, once the divestiture was completed, and AT&T’s dividend received a 28.2% haircut.
Unfortunately, T stock has kept tumbling. Like other dividend plays, rising rates have affected its valuation. This further side has again made it a high-yielder (7.49%), yet while one can argue this stock (trading for less than six times earnings) has found a floor, you may want to skip it, and go with Verizon Communications (NYSE:VZ), a stronger dividend telecom play, instead.
Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) may be down nearly 87% from its 2020 all-time high of $568.34 per share, but it’s still one of the telecom stocks to sell. Just because it’s gone from a richly-priced high-flier to a possible value play, doesn’t mean it’s a great opportunity.
With demand for video conferencing services pulled forward by the pandemic, the company’s growth has screeched to a halt. Analysts forecast revenue growth of just 7.1% this fiscal year (ending January 2023), with earnings for ZM stock falling from $5.07 to $3.69 per share.
Not only that, Zoom could potentially fall short of these walked-back forecasts. As Louis Navellier recently argued, the company’s results in the preceding quarter fell short of expectations. Zoom’s guidance for the current quarter also underwhelmed sell-side analysts. Add in high competition from larger tech firms, and there’s a lot pointing to lower prices ahead for ZM stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.