Meta, Alphabet And Disney Are In The Most Battered Sector This Year. Is It Time To Buy?

The most battered sector in the U.S. stock market this year is communication services. This group of stocks has fallen 38% this year through October 28, the worst performance among the 11 sectors recognized by Standard & Poor’s.

Do bargains lurk in the tattered sector? I think so.

The category includes internet powerhouses such as AlphabetGOOGL
, Meta Platforms (META), and TwitterTWTR
. It comprises the parents of all three traditional broadcast networks, ABC (Walt DisneyDIS
), CBS (Paramount Global, PARA) and NBC (ComcastCMCSA
).

ADVERTISEMENT

It also contains telephone companies such as AT&TT
, T-Mobile US (TMUS) and Verizon (VZ). And there are nine more companies, including a couple of ad agencies and a trio of video game makers.

Many of these companies depend on subscriptions or ad revenue or both. These are discretionary spending items. With many people expecting a recession, and with the Federal Reserve raising interest rates, customers are becoming stingier.

Here are my thoughts on the five largest communications services stocks, plus Twitter, which is in the spotlight because it’s just been bought by Elon Musk, the world’s richest man.

Alphabet ($1.26 trillion market value) is the parent to GoogleGOOG
, the most widely used search program. It owns You Tube, an eyeball magnet. It owns Waymo, which I believe is the leader in the race to develop a reliable self-driving car. And it owns Deep Mind, which works with artificial intelligence.

ADVERTISEMENT

Alphabet is down 34% this year through October 28. After this downturn, the stock sells for 19 times recent earnings. That’s more than I will normally pay, but I consider Alphabet the most innovative company in the U.S.

Meta Platforms ($266 billion), formerly Facebook, depends on ad revenue, which is falling lately. That’s partly because the economy is slowing. I suspect it’s also because privacy safeguards make it harder for Meta to collect personal data in order to customize ads.

In addition to Facebook, Meta also has two very popular platforms, Instagram and What’s App. It has close to $42 billion in cash or marketable securities. On the minus side, I think regulators will continue to give Meta a hard time about how it gathers and shares people’s personal data.

ADVERTISEMENT

Meta stock has fallen from above $350 to just below $100 in the past year, making the stock tempting. But there are other choices in the sector I like more.

Walt Disney ($193 billion) owns theme parts, movie studios (Disney, Pixar, Lucasfilm and Marvel) characters and franchises such as Star Wars, ABC television network, ESPN and Hulu. Many parts of the Disney empire are mutually reinforcing, in my view, and that’s a big reason I like the stock.

Further progress in fighting the Covid-19 pandemic would help Disney, bolstering attendance at movie theatres and theme parks.

T-Mobile US ($189 million), which is 48% owned by Deutsche Telekom, has been adding subscribers at a faster rate than AT&T or Verizon. It acquired SprintS
in 2020. And it recently struck a deal with Elon Musk’s SpaceX to provide wireless service to “dead spot” rural areas of the U.S.

These developments have excited investors, who have pushed T-Mobile shares up 32% this year in a down market. I don’t recommend the stock, though. It sells for 110 times recent earnings–far too high a multiple for my taste. And finances seem shaky, with debt greater than stockholders’ equity.

ADVERTISEMENT

Verizon, like other phone companies, has become a broadband carrier offering combination packages of phone service, internet and television. It also owns the AOL and Yahoo Internet portals. A strong point is the dividend yield, 6.8%. A weak point is the debt level, 1.99 times stockholders’ equity. I think the stock will do okay, but there are others I prefer.

Twitter is a wild card, after Elon Musk bought the company, giving shareholders a 26% gain for this year. We don’t know what Musk will do with the company. Presumably, he will favor free speech and reinstate some people (perhaps including former president Donald Trump) who had been banned from the forum.

Musk has had big successes with Tesla and SpaceX. But for any internet forum, the problems of hate speech and distortion of facts are real and can’t be easily solved by algorithms. We’ll see what the new “chief Twit” does.

ADVERTISEMENT

Disclosure: I own Alphabet, Disney and Paramount Global personally and for most of my clients.