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NOVEMBER 5, 2002

INSIDE WALL STREET ONLINE
By Gene Marcial

Bargain Hunting in the Telecom Bin

Kevin Lane of Technimentals Research is among the contrarians who see big gains ahead for some major names in this sad sector

Gene Marcial is BusinessWeek's Inside Wall Street columnist

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Telecom and wireless stocks sure have been severely battered, caught in the crushing meltdown that hit this industry and the entire technology sector. But some hardy contrarians, as well as the opportunistic "smart money" looking for washed-out bargains, are now starting to see the telecoms as exactly that -- badly beaten-down stocks that still have some value.

Kevin Lane, chief market strategist at Technimentals Research Group, is among the few who think the depressed telecom-wireless sector could be ripe for a recovery. Make no mistake: The industry's news continues to be dismal. But Lane thinks that during cyclical downturns, when things can hardly get any worse for certain sectors or stocks, investors should take "educated risks" on companies that have become very undervalued -- and could be future winners. Technimentals uses both technical and fundamental factors in analyzing companies and their stocks.

Lane notes that the telecom industry continues to contract, and companies are still cutting jobs by the thousands, leaving dozens of telecom execs questioning whether demand and profitability will ever come back. This devastating trend might continue through yearend and quite possibly into 2003, warns Lane. Nonetheless, he argues that some pros have begun to take notice of "cheap values" among telecoms that they believe still have useful products and sound business plans.

"VIABLE CORPORATIONS."  Among these companies, says Lane, are AT&T (T
), Verizon (VZ
), AT&T Wireless (AWE
), SBC Communications (SBC
), BellSouth (BLS
), and Nextel (NXTL
). "They are all financially viable corporations that are in the process of reducing their capital-spending programs back to ratio ranges that are more appropriate to current revenue streams," says Lane.

Back in the 1990s, these companies joined the rush among the dot-coms in uncontrolled spending, which resulted in severe overcapacity. "The great inventory correction that ensued decimated the sector to where it stands today," notes Lane. But it seems that these companies are now in the process of changing their ways, he adds.

AT&T, says Lane, will benefit from a better corporate-spending climate into 2003. Long-distance services are still in demand, and AT&T may represent the one mainstay in an industry filled with failed startups, he argues. This, no doubt, will increase AT&T's customer base which, in turn, will intensify call volume and revenues.

READY TO CLIMB?  Debt levels are still a question mark at AT&T, but they're improving, says Lane. If this trend continues, its credit ratings will improve, which would give AT&T greater acccess to capital. Its stock, now at $13 a share, traded as high as $21 in the summer of 2001. Technimentals' Senior Technical Analyst Douglas Lomma forecasts that it'll rise to $20 over the next three to six months.

AT&T Wireless shares, now at $7.48, hit a low of $3.25 on October 9, 2002, after touching a 52-wek high of $15.44 on November 5, 2001. Over the next three to six months, Lomma thinks they'll leap back to $15.

In the case of Verizon, Lane notes that it has been rapidly building its long-distance customer base as it continues to drive into new domestic markets. And Verizon's wireless unit keeps rolling out services that are attracting many new customers. The Baby Bell is also leading the way in DSL high-speed Internet access, especially in the Northeast, where it dominates in other product areas, says Lane.

WHEN DEMAND RETURNS.  Verizon shares, which hit a low of $27 in late July, are now trading at $39. The stock hit a high of $51 a year ago. Lomma sees it testing the $40 level before it moves upward to $45 to $50 in the coming three to six months.

SBC is attractive for its strong balance sheet in comparison to most other telecoms, says Lane. Its multiple product lines, he adds, will no doubt be strong revenue producers when the economy and corporate demand for telecom equipment pick up. Cingular -- SBC's wireless unit in a joint venture with BellSouth -- and its DSL services should also help boost earnings in the coming quarters, says Lane. SBC's stock, now at $27, isn't far from its low of $20 touched on Sept. 30. Over the near term, it could move up toward the $35 to $40 level, predicts Lomma.

Nextel is the gem of the group, asserts Lane, who thinks it's easily beating its wireless peers. It has largely outperformed in a dismal market. Nextel is leading in the revenue-per-user category and has been quite aggressive in its advertising program, notes Lane. Recent reports about Nextel's growth prospects and increases in customer count should continue to propel the stock upward, he says.

REACHABLE TARGET.  With Nextel's base of wireless handsets already Internet-friendly, new products will be easy to roll out in comparison to its peers. Its stock has had a dramatic move, from $2.78 a share on July 7, 2002, to $12.97 on November 4, 2002. A target of $20 is reachable over the next three to six months, says Lomma.

If Technimentals is on the money in its forecasts, these telecom and wireless stocks may soon be delivering positive messages to investors.

Marcial is BusinessWeek's Inside Wall Street columnist

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