Gavekal Capital: Now Is Probably Not The Time To Be Buying Telecom Stocks

Monday, May 12, 2014

Now Is Probably Not The Time To Be Buying Telecom Stocks

Telecom valuations seem to be either in the penthouse (as they are now and as they were in 2005-2007) or in the outhouse (as they were from 2001-2003 and 2008-2010). The charts below show the percent of Telecom stocks that are trading within 25% of their 3-year, 5-year and 7-year max valuation. We look at P/E, P/CF, P/S and P/B on each chart.

The 3-year chart shows the most extreme valuations with 100% of stocks trading within 25% of their 3-year max valuation based on P/S. This is the highest level since November 2006. Looking at the other three valuation metrics, we see they are at even more extended historical valuation levels. 95% of stocks are trading within 25% of their 3-year max P/B level. This is the highest level since February 2002. 88% of stocks are trading within 25% of their 3-year max P/CF level which is the highest since April 2002. And finally, 71% of stocks are trading within their 3-year max P/E level which is the highest since March 2002. Anyone that remembers the TMT bust may shutter looking at these valuation levels.

The absolute level are lower looking at it from a 5-year or 7-year perspective. The trends, however, remain in place. Regardless of how you slice it Telecom valuations look stretched.

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Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
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