Making the Right Call on Telecom Stocks

Rumors Tuesday that telecommunications giant MCI WorldCom is considering buying wireless provider Nextel Communications added more fuel to a raging telecom-stock rally.

Like Internet shares, telecom stocks have attracted an army of investors in recent quarters. The bet is that the upgrading of communications networks worldwide has a long way to run.

That has fed a spate of mergers as companies try to fill holes in their product lineups. WorldCom bought MCI Communications last year, AT&T; acquired Tele-Communications Inc. this year, and Britain’s Vodafone Group is in the process of taking over AirTouch Communications.

But telecom has always been a difficult sector for individual investors to make sense of. Aside from the arcane terms and complex technology, scores of U.S. and foreign companies are spread across sub-sectors as varied as equipment makers and wireless service providers.

Still, promising stocks often share two traits: rapidly growing earnings, and market performance that is already above average.

Using data from StockTables.com, a financial Web site, the accompanying chart lists some telecom stocks that rank highly on scoring systems that compare earnings growth and stock price performance over the last year.

The “EPS rank” in the chart measures a company’s one-year earnings per share growth against all other public companies, on a 1-to-99 scale. For example, a stock with an EPS score of 91 has notched better profit growth than 91% of all other companies.

The “relative strength” rank, meanwhile, gauges the performance of a company’s stock against the shares of all other companies over the last year. Thus, a relative strength score of 94 means the stock has outperformed 94% of all other stocks during the last 52 weeks.

Stocks that have done well in the past, of course, don’t necessarily do well going forward. So, many investors who engage in this kind of “momentum” investing try to avoid jumping aboard a stock just as its lengthy run is about to reverse.

To guard against that, many technical analysts advise that investors buy stocks that are just breaking out of what are known as bases.

A base is a period during which a stock more or less moves sideways as it consolidates past gains. That digestion period is thought to act as a “foundation” from which further advances are possible.

Stocks that begin to surge, in heavy trading, from bases lasting at least eight weeks are thought to have the best chances for sustained gains.

For example, Lucent Technologies surged out of a three-month base Tuesday, rising $5.69 to $64.63 on a jump in volume.

Northern Telecom broke out of a base Monday, while E-Tek Dynamics also has broken out.

By contrast, some of the stocks on our list, such as Qualcomm, Carrier Access and Uniphase, appear to be extended--meaning they’ve risen very far, very fast.

Those stocks can rise further, of course. But the odds increase that the shares could be hit with at least short-term pullbacks.

For example, Qualcomm broke out of a base on March 25 after settling a patent dispute with Ericsson. It gained $11.06 that day and closed at $98.44. It’s now at $145.94.

Long-term investors may not care about a short-term pullback. But those with shorter time horizons may want to delay purchasing any stock that is extended, focusing instead on those that may be breaking out of a base.

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Times staff writer Walter Hamilton can be reached by e-mail at [email protected].

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Listed below are earnings-per-share and relative-strength ranks of leading telecommunications stocks. EPS measures a company’s one-year earnings performance against all other stocks. An EPS score of 91, for example, means a company’s earnings growth has exceeded that of 91% of all other companies. Relative strength gauges its 12-month share price performance against other stocks.

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Relative Ticker Tues. Tues. EPS strength Company symbol close Change rank rank AirTouch Communications ATI $98.63 +$1.13 91 94 ADC Telecommunications ADCT 50.94 -0.31 94 95 Carrier Access CACS 68.25 +2.38 76 94 Comverse Technology CMVT 88.94 -2.50 97 94 Gilat Satellite Networks GILTF 60.75 +0.38 96 88 Global Crossing GBLX 43.38 -1.63 76 95 MCI WorldCom WCOM 89.56 -2.94 81 94 Lucent Technologies LU 64.63 +5.69 95 84 Northern Telecom NT 67.69 +1.50 87 89 Qualcomm QCOM 145.94 -2.94 94 99 Tellabs TLAB 107.25 +3.81 98 94 Uniphase UNPH 125.88 -3.81 96 98 Vodafone Group VOD 192.00 +1.88 96 89

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Sources: StockTables.com, Bloomberg News