Which telco should you own?

The industry is booming. Don’t miss out on your chance to grab a hold of these 3 great stocks.

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The best investors stay two steps ahead of their opponents.

It’s all well and good to think interest rates are low so let’s go and buy dividend stocks, but by the time you’ve had the idea so has everyone else. Staying 2, 3 or 4 steps ahead is what it takes to become truly successful in the stock market.

That doesn’t mean investing in trends, but buying stocks investors are currently selling down can yield favourable returns in the long-term. For example, Vodafone Australia’s part-owner Hutchison Telecommunications Australia (ASX: HTA) was dumped on the back of continuous network failures and an extremely poor level of customer service dating back to around 2011.

Just take a look at the next graph.

HTA 2009 193
Source: Google Finance

However despite the company still rapidly losing mobile subscribers its share price is up 193% since the 4 January 2013. It appears savvy investors thought two steps ahead and predicted the downwards trend wouldn’t continue.

Unfortunately it takes a lot of time, research and mental toughness to make such a bold call. However, you don’t have to be a genius nor make such shrewd investments in the telecommunications industry to be successful because there are so many companies likely to play a bigger role in our lives many years from now.

Leverage from a legend

Peter Lynch, one of the world’s best fund managers and investors, has a number of famous investing quotes but perhaps the most applicable to the telecommunications industry is this one:

“During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.”

Fast forward to now and everyone wants a technology stock (or five) in their portfolio. Riding on the backs of great success stories like Facebook and Google, every investor wants a chance to win big.

But here’s a question for you to consider: What would Google or Facebook be worth if we didn’t have access to the internet?

It appears too many investors are going for gold and too few are looking at the companies driving their success right here on our home turf. If you don’t want your portfolio to bear the brunt of another tech stock sell-off, or make gutsy calls like some investors did with Hutchison Australia, these next three companies are right for you.

Growth: Vocus Communications Limited (ASX: VOC)

Vocus provides high performance and highly scalable communications solutions for its clients. It’s network of cables span from Hong Kong to Los Angeles to Perth to Christchurch. With demand for more reliable internet connections, it’s no wonder Vocus’ earnings are tipped to grow by 130% between now and 2016. Although it trades on multiples of around 38, it’s deserving of its current price tag.

There could be valid arguments for many companies to come under this title. Shareholders in TPG Telecom Ltd (ASX: TPM) could argue their company’s track record affords them the number-one position. Unfortunately, it appears TPG is more than fully valued at current prices.

Income: Telstra Corporation Ltd (ASX: TLS)

No surprises here. Why not go with the most reliable and legendary dividend payer on the ASX. Like its smaller counterparts, Telstra will benefit from the long-term tailwinds of the sector but also from superior mobile network coverage and a commanding lead across a number of sort-after product groups like business networks, cable internet and cloud computing.

Undervalued: M2 Group Ltd (ASX: MTU)

M2 is the owner of the Dodo, Primus, Eftel and Commander brands. Although it’s not as infrastructure heavy as its counterparts, M2’s aggressive expansion into the client facing side of the industry has paid off and the debt from its acquisitions is falling quickly. Earnings are expected to leap higher in the next few years as the synergies from its takeovers come into play.

Long-term, M2 could utilise its huge customer base to grow its other services such as insurance and utilities. Trading on a forward price-earnings ratio of around 11, M2 Group is a bargain.

Foolish takeaway

Each of these three companies deserve your attention and perhaps your consideration. As always, these three businesses are exciting long-term companies which appeal to different types of investors. Play two steps ahead but don’t go straight for the King, be smart and acknowledge what is going on right in front of you.

Wondering where you should invest $1,000 right now?

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*Returns as of January 12th 2022

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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