This is quite the spin as the telco monoploy continues...

Dawn DiPietro

Telecommunications sector begins to revive

Telecommunica-tions investing is back. Resuscitated by dramatic acquisitions and expanding technologies, it is trying to shake off the depression that overtook it after the technology bust.

Telecom funds are up 11 percent this year and 29 percent in the past 12 months, according to Lipper Inc., outpacing the broader market. Yet this complex field, which combines advanced technology and traditional telecommunications utilities, remains unpredictable.

Take the dramatic change that has shaken up the industry of late:

SBC Communications bought AT&T, changed its name to AT&T and then agreed to acquire BellSouth; Sprint merged with Nextel; Verizon Communications bought MCI; France's Alcatel agreed to buy Lucent Technologies; Telefonica of Spain bought British wireless provider O2 PLC; and eBay acquired Internet phone service Skype.

China Mobile Communications Corp. is aiming to bid for telecoms around the globe.

"Twenty years ago, government was trying to put more regulation on the telecom industry to try to tear down large companies, but now everything's in the opposite direction," said Matthew Wu, portfolio manager of Rydex Telecommunications Fund "A" (RYTLX), up 9 percent this year and 22 percent the past 12 months. "Diversified telecom companies have high fixed costs, so expect mergers and acquisitions to continue as they seek improved economies of scale."

The sector's volatile history shouldn't be ignored. Yet a powerful new driver is the fact so many countries now demand state-of-the-art communications.

"The resurgence in telecommunications is due to an international burst of interest in connecting people wirelessly," said Albert Lin, co-head director of research for American Technology Research Inc. in San Francisco.

The key to handicapping which companies will be winners, losers, acquirers, acquired or failures is to follow the technology and discard usual company labels, experts said.

"Investors can no longer just look at the past performance of telecoms and how they've managed their businesses, but need to look deeper at their technologies and core values," said David Weissman, senior analyst with Zacks Equity Research in Chicago.

Strong telecom fund performers have recently been ProFunds Ultra Telecommunications Services (TCPSX), up 15 percent in 2006 and 17 percent the past 12 months; Fidelity Select Telecommunications (FSTCX), up 10 percent and 25 percent; and T. Rowe Price Media and Telecommunications (PRMTX), up 14 percent and 39 percent.

But for those interested in individual stocks, owning shares in several successful giants would be a sensible move right now, experts say:

• Sprint Nextel Corp. (S), which has done a decent job of retaining customers following its merger and also has spun off its declining Embarq Corp. local telephone unit, is a Weissman recommendation.

• Verizon Communications Inc. (VZ) is a Lin choice because it is such a large operator and boasts the most loyal and financially attractive wireless customer base.

• Nokia Corp. (NOK), which has regained its momentum by offering new cell phones at both ends of the price spectrum, is likely to remain No. 1 in handsets for some time, Lin said.

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