INSUBCONTINENT EXCLUSIVE:
SAN FRANCISCO: An overhauled telecommunications sector featuring most of the so-called FANG stocks could debut as Wall Street's hottest bet
when it kicks off in September, boosted by a rising wave of media and television acquisitions.
Long viewed as stodgy stocks for
dividend-oriented investors, the telecom services sector will be renamed communications services and supercharged with the addition of
Facebook, Netflix and Google-owner Alphabet- three of the four FANGs, along with Amazon - as well as other companies that have driven the
stock market to record highs in recent years.
The changes are part of the largest-ever shakeup of the stock market's broad business
categories.
In total, 14 SP 500 companies, including Netflix, will shift from the consumer discretionary sector into communications, joining
ATT, Verizon Communications and CenturyLink in the biggest shakeup of the Global Industry Classification Standard, or GICS, since it was
Five SP 500 companies will switch from technology to communications.
The new sector will also include Walt Disney, Comcast and other
entertainment and media companies scrambling to consolidate and fend off competition from newcomers Netflix and Alphabet, which produce
content and sell it directly to consumers.
The floodgates for such deals were sprung open this month by a legal ruling giving ATT the
go-ahead to buy Time Warner for $85 billion.
"Among all of the sector groups, this is going to be the most dynamic," predicted Jack Ablin,
chief investment officer at Cresset Wealth Advisors in Chicago
"You will see a lot of deal activity in the coming months, and it will be an awakening for anyone who is not on top of it."
Amazon.com, the
fourth FANG stock, will stay in consumer discretionary and represent nearly a third of that sector.
Classifying companies within 11 major
sectors and several sub-sectors, GICS is closely followed by sector analysts and investors
Its overhaul, which has yet to be finalized, aims to reflect the evolution of the media, telecommunications and Internet industries.
Getting
a head start on the September revamp, State Street Global Advisors on Tuesday launched the Communication Services Select Sector SPDR Fund,
benchmarked to the sector's future configuration.
Reflecting Wall Street's willingness to pay top dollar for companies like Alphabet,
Netflix and Activision Blizzard , the newly constituted communications sector would trade at 19 times expected earnings, nearly double the
sector's current multiple, according to Thomson Reuters I/B/E/S.
Earnings of the newly constituted communications sector are expected to
jump 23 percent in the final quarter of 2018, compared with an estimated 12 percent increase under the sector's current configuration.
Over
the past five years, the telecommunications sector has had a total return of just 16 percent, including dividends
Under its new configuration, it would have had a total return of 110 percent and outperformed the SP 500's 85 percent return, according to
Credit Suisse equity strategist Patrick Palfrey.
Media, television and wireless companies, all of which will become part of the
Communications sector, see buying content producers as a way to add revenue.
Twenty-First Century Fox has surged 20 percent since June 13,
when Comcast offered $65 billion for its media assets, outbidding an offer from Walt Disney, which responded on Tuesday by raising its bid
to $71 billion.
Sprint, T-Mobile, Viacom, CBS , Dish Network and Discovery have risen between 6 percent and 34 percent in June.
Even if MA
speculation subsides before the GICS changes take effect, the addition of most of the FANGs and several other high-growth former tech stocks
will make the communications sector attractive, said Michael James, managing director of equity trading at Wedbush Securities in Los
Angeles.
"Interest in the sector and the individual names is not going to dissipate," James said.
