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5 Telco Stocks to Trade This Month - views
BALTIMORE (Stockpickr) -- This market is sending investors a clear message in 2013: "Buy the boring stocks."
Boring stocks -- "quality names" such as blue-chip utilities, health care names and telecom firms -- have been on fire in 2013, outperforming the kinds of more speculative names that typically stomp more conservative stocks in later stages of a rally. That suggests a couple of things: We're still in the early stages of this rally right now, and investors are still nervous about its staying power.
In particular, communications stocks have been an interesting part of the quality stock bandwagon. They offer a boring business, utility-like revenue performance and some of the biggest dividend yields on the market today. That makes telcos worth a closer look as this rally keeps chugging along.
So today, we'll take a technical look at how to trade five big name telecom stocks.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
So without further ado, let's take a look at five technical setups worth trading now.
First up is BCE (BCE), a company that's better-known as Bell Canada. BCE has been partaking in the performance smorgasbord in 2013, climbing double-digits since the start of the new year, but unlike U.S. peers, it hasn't kept up with the broad market. That could be about to change thanks to the technical setup in shares right now.
BCE spent the last month trading sideways in a rectangle pattern, a technical pattern that's formed by horizontal resistance and support levels that are boxing in shares. The pattern broke out last week on a move through the top of the pattern; that's a buy signal for traders right now. BCE's price action has been orderly since shares made their big swing low back in November, which bodes well for investors who want exposure to a less volatile name in May.
One big risk-limiter in BCE right now is the abundance of support levels that are nearby. That fact should make it easy for the firm to catch a bid if shares unexpectedly correct. If you decide to jump in here, I'd recommend keeping a protective stop at the 50-day moving average.
Satellite communications firm ViaSat (VSAT) is showing off the exact same setup right now -- it's just earlier on. Shares of the $2 billion satellite firm broke out back in February on good earnings numbers, but the stock has been consolidating sideways in a rectangle ever since. Now a test of $49.50 resistance is close to triggering a buy.
Yesterday, VSAT closed above resistance for the first time, a bullish sign. It's still a little early to call the breakout confirmed -- today's trading session should say a lot about the significance of yesterday's move. If shares remain above $49.50 for the entire session today, I'd call the pattern confirmed.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles, rectangles and other pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That resistance line at $49.50, for example, is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the breakout above it so significant -- it indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
Waiting to see that sellers are gone increases the probability of a successful trade, even if it means leaving some potential profits on the table.
The biggest name on this list is Verizon (VZ). The $150 billion telecom stock is one of two standard bearers in the wireless and fixed line phone business -- but I'm not here to trumpet Verizon's successes today. Shares look "toppy" in the short-term.
Sure, Verizon has posted some strong performance this year. Shares of the carrier are up more than 20% since the calendar flipped over to 2013. But now, a head and shoulders pattern points to a top in the massive telco. The head and shoulders is a price pattern that indicates exhaustion among buyers. The pattern is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern's "neckline" level, currently right below $52.
Momentum, measured by 14-day RSI, adds some extra downside confidence to this trade. The long-term uptrend in momentum broke in yesterday's session. To be clear, this is a short-term setup; even so, longer-term investors looking to build a position in VZ would be wise to wait for it to find a new lower support level first.
UK-based telco BT Group (BT) looks a little more bullish right now -- and you don't need to be an expert technical analyst to see why. Shares of BT have been trading in an uptrending channel since the start of last summer. That tight range for shares continues to be significant as another summer approaches.
The trend line support and resistance levels give us a high probability range for BT to trade within. And as you might expect, the ideal time to be a buyer is on a bounce off of support. When you're looking to buy a stock within a trend channel, buying after a bounce off of support makes sense for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). That means that buyers would do better to wait for BT to correct from here before jumping in.
At first glance, the abundance of gaps in BT's chart makes it a little tougher to read -- but you can ignore them. Those gaps, called suspension gaps, occur because BT's shares trade off U.S. hours on the London Stock Exchange. From a technical standpoint, they're not significant.
Last up on our list of tradable telcos is Cincinnati Bell (CBB), a small-cap phone carrier that's posted some distinctly different price action over the last year. While most other communications stocks are up quite a bit in 2013, CBB is actually down more than 36% year-to-date. But there's still a trade to be made in this stock right now.
CBB made a parabolic drop in the first quarter of the year, falling from a price in the mid-$5 range to a 52-week low in the high $2s. But shares have been staging a comeback from those lows, and it's been an orderly one. Since bottoming in March, CBB has been trading higher in a very well-defined uptrend. That series of higher highs and lows makes CBB an interesting opportunity for traders looking for a telco trade with ramped up risk/reward this is a much more volatile stock.
With shares testing trendline support today, I'd recommend being a buyer on the next white-bar day. Just keep a tight stop in place.
Momentum adds some confidence to this trade too. 14-day RSI has been in an uptrend since just before CBB bottomed, and it's continuing to push higher. Since momentum is a leading indicator of price, that bodes well for this beaten-down telecom stock in the second quarter.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji