Industry Voices—Raynovich: Bargains abound in tech and telco stocks

With the current market conditions, now is a good time to take a hard look at buying certain telco and technology stocks. (Pixbay)

The technology, media, and telecom (TMT) industries, just like every industry, have been battered by a market selloff related to the spread of COVID-19 and the resultant economic slowdown. It's going to be a tough year. But just like all other market panics before it, this could be an opportunity to pick of the shares of quality companies at good prices.

In the fastest 20% stock market decline in history, shares in communications equipment and media companies, as well as cable and telco companies, are down anywhere from 20% to 40% from the recent market peak. The reason the collapse has happened so fast can be attributed to a number of factors. First, the stock market was highly valued on a price/earnings (P/E) basis prior to the arrival of the crisis (in January the market was trading at a average P/E of 24, well above it's long-term norm of 16.)

Second, the nature of the crisis is unique—the arrival was swift on the global stage, and the economic impact has been unprecedented. Caution about COVID-19 has resulted in a global shutdown of many basic services and manufacturing, which will put a gigantic dent in Gross Domestic Product (GDP) as well as earnings for the year. Many economists believe a recession is now highly likely—it's just a matter of how deep it is and how long it lasts. 

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But think out two to five years from now. A flood of liquidity, in the form of fiscal stimulus and low interest rates, is going to hit the market. One has to hope that in three to six months, the virus is under control. A year from now, we could have a vaccine. Many technology projects will move forward. People will buy new phones again. In the meantime, they will all be streaming Netflix, using social media, and accessing the internet. The communications infrastructure is more important than ever before. 

There's a way to start here, without taking too much risk: Take a look at strong companies with lots of cash trading at decent prices. Then think long term: What is the potential for these companies to earn over the next 10 years, as the economy recovers? 

The P/E ratio is the most closely followed metric for the valuations of stocks, and there is a reason. It tells you what the company is selling for relative to its earnings per share. For example, if a company earns $1 per share, and it sells at $10, it has a P/E of 10. It's a good reference point because it tells you how fast you could get back your money in earnings if you invest. For example, at a P/E of 10, a company earns back the price of its stock in 10 years. 

There are many other variables, of course. How fast is the company growing? What are interest rates? Lower interest rates generally produce higher P/Es because the cost of capital is low. Interest rates are now at historic lows, but the selloff has produced many quality stocks well below the low-run average P/E of 16. Earnings are likely to be disrupted this year, but think of that as a disruption of a year in the course of a company's multi-year earnings potential. 

Here are several quality companies, along with their stock symbols, that pop up on my screen of low P/Es that seem to be priced low in this crisis. 

Arista Networks (ANET)

Just a couple years ago, Arista Networks was an investor darling, regularly posting spectacular returns. Then last year, it hit a lull, with challenges at some of its larger webscale companies. Arista now trades at a P/E of about 16, the cheapest its been in, well, forever. 

Here's a reason I really like Arista. It's led by famous Silicon Valley tech stars Jayshree Ullal (CEO) and Andy Bechtolsheim (chairman), it's got a huge war chest of $3 billion, or $31.85 per share in cash with a market cap of $14 billion. Earnings per share are expected to come in at about $10 per share this year. Even if that dips, the company is in great shape for the future and can use its cash to buy high-quality startups whose valuations are likely to fall now. An example is its recent opportunistic pickup of Big Switch Networks. Arista is now making a move into the campus/enterprise market to diversify out of the cloud and I would watch this space for intriguing developments. 

RELATED: Arista beats out Dell, Cisco, Gigamon and Juniper to buy Big Switch Networks

Ciena (CIEN) 

Optical network and telco infrastructure play Ciena is currently a very cheap stock with solid growth prospects, despite a mid-term slowdown. It trades at a trailing 12 months (TTM) P/E of 6, with projected earnings of about $3 in the current year. It grew earnings five-fold in 2019. Even if its earnings take a sizable hit in 2020, its in good shape. Ciena holds $5.51 per share (about $1 billion) of cash on its balance sheet and $700 million in long-term debt, so liquidity issues seem remote. 

Even if the COVID-19 crisis pushes out investment in telco infrastructure, including 5G deployments, Ciena is well positioned to take advantage of the next investment wave, with an optical, routing, and software portfolio that has been optimized for 5G. It's orchestration and management platform, Blue Planet, is best-in-class in the industry. 

Intel (INTC)

Regarded as a technology blue chip, Intel has a long history of earnings and dividend payments. It's been raising its dividend for the last 10 years and it is currently paying 2.64%. The shares trade at about 10 times both TTM and forward earnings, and it holds $2.70 per share in cash. Even if earnings fall 20% to 30% in this environment, the stock is a deal. 

The most interesting thing about Intel is that it has a new CEO, Bob Swan, who took over at the beginning of last year. According to the New York Times, Swan is trying to shake Intel up to make sure it can take advantage of new trends such as edge compute and Internet of Things (IoT). This seems like a stock you can buy and safely put away for many years. 

Verizon (VZ)

Verizon is currently trading at a trailing P/E of 11.7, with projected earnings of $5 per share this year. That's likely going to drop, but even with earnings of, say, $4 a share, over the next 10 years, this is a cheap stock. It also pays a 4.53% dividend. Verizon is a utility and utilities are generally regarded as defensive stocks. People aren't going to throw away their phones. They have become indispensable. 

In the past, I've been cautious about Verizon's debt level, but currently interest rates are falling, not climbing, so debt is not likely to be a problem for many years, and the company has made statements to the affect that it would like to reduce long-term debt. 

(Disclosure: The author recently bought Ciena, Intel, and Verizon in his retirement portfolio, and he intends to hold them for many years.) 

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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