Can telecom sector stocks be contrarian bets?

Not much has changed in my bearish views about the telecom sector stocks since I wrote the previous post a little over a year back. The Sensex and Nifty are in bear markets – so are most of the telecom stocks. But there are always a couple of stocks in every sector that flow against the tide. The telecom sector is no exception. But the answer to the question is: No.

The 2G scam has not yet reached a denouement, except that the former telecom minister and his cohorts are still enjoying free lunches, but behind bars. Those who bid too high in the 3G auctions tried to cut their losses by circumventing auction conditions by sharing resources. The headwinds in the sector remain strong.

Horizontal dotted lines on the two year bar charts below represent price levels at the time I wrote a bearish post back in Oct ‘09.

MTNL

The MTNL stock chart shows why the government should concentrate on making policies that enable businesses to prosper, but not be in business. A monopoly in the lucrative Delhi and Bombay markets couldn’t help the company to gain any competitive advantage. The stock is falling further in a bear market. Avoid.  

Bharti Airtel

Bharti Airtel is the leader in the telecom pack. After dropping to a low of 254 in Jun ‘10, the stock had been in an up trend that reached a peak of 445 in Aug ‘11. The bears decided enough was enough. The stock has fallen below its 200 day EMA, the blue up-trend line and is just about hanging on to the two years old price level of 359. A drop to 325 is possible. Hold.

Reliance Communications

The Reliance Communications stock has lost 75% from the two years old level of 282 to its recent low of 69 – and may drop lower. The only hope for shareholders (those poor souls who are still hanging on) is if ‘big brother’ bails out ‘little brother’. Do not touch with a 10 ft pole.

Idea Cellular

In my previous post, Idea Cellular was recommended as a contrarian play, and is the only stock to make some gains in the past two years. Though technically in a bull market, the good times seem over for now. Book profits, or hold with a strict stop-loss at 80.

Tata Teleservices (Mah.)

Tata TeleServices is at a critical support level of 14. All efforts at rallies have been met with selling by bears. If 14 is broken – and the probability is high, it may become a penny stock. Avoid.

Subex

The stock of Subex had made a good recovery and was forming the handle of a possible cup-and-handle bullish pattern. Only, the handle turned into the first leg of a down trend that has pushed the stock price deep into a bear market. The stock has lost 70% from its Nov ‘10 high of 95 to the recent low of 28. THe market has punished companies with high debt. Avoid.

OnMobile Global

The OnMobile stock has been pummeled out of shape – an example of how sentiments can play havoc with a fundamentally strong stock. For the past few months, the stock has been consolidating within a rectangular band between 54 and 73. There is a good possibility of the stock trying to form a bottom here. This can be a contrarian bet, but with a strict stop-loss at 52.

Geodesic

The Geodesic stock was a favourite of small investors in the previous bull market – thanks to the presence of the ‘RARE’ bull. But I could never figure out how they were making money (in spite of working in the IT industry for almost 30 years). The company has spun a web of subsidiary companies – many of which are located in tax havens. “Daal may zuroor kuchh kaala hai”! THe stock is falling deeper into a bear market. Stay far away.

Tanla Solutions

Tanla was falling deep inside a bear market when I looked at it a year back. The chart is an example of how a stock which has already fallen a lot can fall much further. It has become a penny stock. Avoid.

MRO-Tek

MRO Tek has also turned into a penny stock in spite of being around for more than two decades and being in the growing telecom and networking hardware business. Those who trade in this stock are either very brave or very foolish. Volumes indicate that their numbers are quite small. Don’t touch it.

Related Post

Should Indian investors switch out of Telecom Sector stocks?

Changes in Sensex constituents

Just read the news that two of the BSE Sensex stocks that have been real laggards are going to be replaced. This should come as a blessing for the bulls. Without any change in the macro environment, the Sensex will be able to recover some badly lost ground.

In this post written a couple of months ago, I had written: 'Dropping Rel. Comm. and Rel. Infra. from the index would not hurt either.' Those are the two stocks that are being replaced by Sun Pharma and Coal India. Expect a spurt in the prices of the two new entrants as index funds will be forced to replace the two ADAG stocks.

The bad news? The changes will come into effect only from Aug '11.

Should you invest in Telecom Sector stocks?

Regular readers of this blog may be aware of my bearish view about the telecom sector. I had written a post back in Oct ‘09, advising investors to switch out of telecom sector stocks. There were many reasons for such advice: commoditised services, strong competition from overseas players, regular capital expenditure, astronomical fees for new licences, falling ARPU (average revenues per user).

Adding to the litany of woes for the sector is the 2G licence scam that has cost the Telecom Minister his job. The government is under severe pressure from the opposition to act due to several recent scams involving massive sums of money. Any action may lead to fines and penalties on telecom service operators who either obtained their 2G licences through dubious means, or paid too little for it, or sold their licences to others at huge profits.

Does that mean all the stocks in the sector should be shunned? Given below are ten telecom sector stock charts – five of them are telecom service providers and the other five provide software services and network hardware. All the charts have a horizontal line representing the closing price of the stock on Oct 6 ‘09 (the day I wrote my bearish post on the telecom sector).

MTNL

This PSU, which had a monopoly on fixed line services in Delhi and Mumbai, has fallen on hard times. It slipped into a loss last year and has dropped below the falling 200 day EMA. Both the RSI and slow stochastic are in oversold zones. Use any rises to sell.

Bharti Airtel

Bharti Airtel is the jewel among the telecom pack, but has lost quite a bit of its lustre. Many investors are still bullish about the stock. However, barring a few days in Sep ‘10, the stock has remained below its Oct 6 ‘09 closing level of 359. The Zain acquisition in Africa is yet to add to the bottom line. The recent up move has ended with a head-and-shoulders bearish pattern with a neckline at 320. A pullback to the neckline may be an opportunity to sell.

Reliance Communications

What can I say about the Reliance Communications stock chart? The Oct 6 ‘09 closing level of 269 seems a distant dream. Losses in three of the past four quarters. If you are holding this stock, ask yourself: Why?

Idea Cellular

What have we here? A telecom services company that is trading higher than its Oct 6 ‘09 price! Hand it to the management acumen of the Birlas and the innovative ad-campaign featuring the ‘baby B’  for turning the fortunes around at Idea Cellular. Steadily gaining market share, this stock is a good contrarian play – provided you wish to invest in the telecom sector.

Tata Teleservices (Mah.)

Despite the Tata name and their best efforts, the bottom line is a sea of red. The stock has remained an underperformer. Sporadic moves above the falling 200 day EMA have been used as selling opportunities. Avoid.

Subex

The Subex stock – a favourite of investors in the previous bull market – got hammered during the economic downturn and slipped into the red. The telecom fraud management software provider has since turned around, and is forming a bullish cup-and-handle continuation pattern. The break out above the Oct 6 ‘09 closing price has been on strong volumes. The dip (forming the ‘handle’) can be used to add. The huge debt burden makes this a high-risk play.

OnMobile Global

Despite its strong pedigree, the OnMobile stock has remained expensive and an underperformer. The value-added software niche has promise that hasn’t yet been turned into performance. One of its big clients – Vodafone – is facing a huge income tax liability. Even now, it is trading at an expensive TTM P/E of 25. Only very patient long-term investors should think about entering this stock.

Geodesic

The Geodesic stock spent the better part of the past 13 months below the Oct 6 ‘09 closing price. Of late, it has moved up sharply to regain most of its lost ground. The stock appears fundamentally sound, but I have neither been able to figure out its business model nor the reason for its considerable unsecured loans. As the old saying in the market goes: if in doubt, stay out.

Tanla Solutions

I really have no idea what they do, or who they do it to. Four straight quarters of losses and a chart that looks like a roller blader going down an icy road is enough to convince me not to give a second look to Tanla Solutions.

MRO-Tek

This network hardware provider has been around for long, but achieved little. I hate to admit it, but I did own this stock for several months during the previous bull market and was fortunate to exit with a tidy profit. Only good for medium-term trading. Not an investment candidate.

Related Post

Should Indian investors switch out of Telecom Sector stocks?