Just as fashions rotate in and out of style, so, too, do stock market favorites. Out of favor big-time these days are communications services stocks. The broad sector includes telecom companies (think AT&T), media and entertainment firms (Netflix), and inter-active media and services (Electronic Arts, Twitter). Rising interest rates and higher inflation have dampened the outlook for shares in growth-oriented companies, tripping up the sector (and others). Over the past 12 months, the S&P 500 Communications Services index has lost 22%.
Fidelity Select Wireless (FWRLX) has done better than the sector index over the past year, albeit with a loss of 9.6%. Manager Matthew Drukker keeps a trim portfolio of 47 stocks, investing in U.S. and foreign stocks across what he calls the “telecommunication ecosystem,” which includes smartphone chip makers, mobile service providers and firms behind popular apps.
A handful of Drukker’s top holdings have posted good gains over the past 12 months, including Apple (up 22%) and chipmaker Marvell Technology (up 27%). But stocks such as social media firm Snap (down 53%) and Swedish telecom company Ericsson (down 42%) have been a drag.
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Drukker isn’t worried. Many of the companies in the fund, he says, will benefit from the rollout of 5G, including Verizon Communications, T-Mobile and Marvell. But adoption of this fifth-generation tech standard for wireless networks has been slow. “We’re a couple years into what is going to be a 10-year cycle,” he says.
For now, it’s business as usual. Drukker favors firms with pricing power, a growing market share, or product innovation that can drive revenue growth and boost free cash flow (money left over after paying necessary expenses to maintain and invest in the business).
Take American Tower, which owns and operates cell-phone towers all over the world. The real estate investment trust bakes in a 3% annual increase to its leasing rates in its U.S. contracts with service providers such as T-Mobile and Verizon. And clients tend to stick around: In some locales, the telecom firms don’t have other options.
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