Option1307 (30.43)

Why I Think Verizon and AT&T Are a Buy at These Levels.

January 24, 2010 – Comments (10) | RELATED TICKERS: VZ , T

and no I haven't lost my mind...

I can already hear people chastising me for making this call, many bears and bulls will think this is a blatantly stupid play. Bears will scream we are headed for the bottom again (maybe we are, I'd love to re-load again) and Bulls will scream this has very little upside potential (fair enough). Let me explain my rational, I promise it makes quasi-sense...

First things first, this is play is definitely more of a defensive one than offensive. If you expect the market continue it's rocket like trajectory upwards to the moon, than ya there are obviously better stocks to take advantage of that (ie anything with high beta values). However, I think this should be a small part of everyone' portfolio at this stage in the game. Yes, it may have limited upside potential, but I believe it to be somewhat immune from any drastic downside as well. Besides, you get paid a rather nice dividend to just hold on and chill out :) This is a safe paly for the next several years (1-5 yrs.).

Looking at a long term chart, you can see that both of these companies are only about 15% above their year lows. VZ and T Yes, they have only rallied ~15% since the march 09 lows. Some people may not like this. However, to me this provides some confidence. It shows me that they have not become boarderline overvalued like the overall S&P500. Also, in simplistic terms it shows that they don't have very far to fall in the event that we get another massive correction (plummet to new lows/end of the world type scenario).

Both companies have decent forward P/E values (using 2010) of 12.0 and 11.0 respectively. Not too terribly bad. If you check out ValueLine (which I love and highly recommend) they have good readings there as well. A predicted CAGR of 15-20% for Verizon and 14-20% for AT&T. Both percentages are good and have traditionally been a successful indicator of good things to come.

Both sell poducts that are here to stay, even in a recession. People will never give up their phones (which IMO is stupid when they can't afford food, but that's neither here nor there...) I know the US cell phone market is becoming saturated (sorry can't find the link right now) but they will continue making money off of the plans themselves. This is part of the reason why I don't see much upside pure growth for them; however, I believe their cash flow to be relatively stable going forward. This cash flow will enable them to keep up with their dividends of 6.3% and 6.6% respectively. Also important to note, neither copmany reduced it's divdend during the downturn last year, and both actually just increased it. Woo! Finally their balance sheets' look pretty clean for both companies, althoguh AT&T does have a somewhat concerning short term debt load of 6.7 Billion.

So why buy now you ask? Excellent question, let's summarize.

1) Both companies are near their year lows (which includes the mighty recession/depression/apocalypse). Thus that leads us to point #2,

2) Decent potential for some upside and limited potential for downside.

3) Solid "blue chip" companies that just aren't going away anytime soon.

4) Awesome dividend (~6%) that looks safe.

5) B/c Option said so! Jk:)

I don't expect to make a lot of bling bling $$ off this play; however, I think it is a relatively safe place to park my money and possibly make a little in terms of capital gains, all the while collecting ~6%. Think of it like a slighty more risky CD. And let's not kid ourselves, those are paying out like 1-3%. Boo that, no thanks!

I currently don't hold any VZ or T, but I will likely scoop sme up in the relatively near future. I'm just debating if I buy now, or wait and see if this pullback has any legs to it. Honestly though, I don't see how either option can go bad.

PS, if I had to pick one, it'd be Verizon simply b/c it's balnce sheet is slightly better looking.

As always, comment, yell, complain away Fools...