Should you buy any telco shares right now?

The telecommunications sector has been one of the best-performing sectors over the last five years and, as the graph below highlights, has outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) by a considerable margin over that time.

Source: Google Finance

Source: Google Finance

Over the past three months, however, the performance of the telco sector has been less than inspiring. In fact, the sector has underperformed the broader market by a whopping 13%. That is a serious margin of underperformance in a relatively short space of time.

Source: Google Finance

Source: Google Finance

Should investors be worried?

A short period of underperformance isn’t something investors should generally be concerned about, but it is important to understand why it is occurring and whether it is a trend that is likely to be reversed.

So what is happening?

The market is concerned about the potential impact of the NBN, along with the individual companies dealing with their own separate issues.

For example, shares of Telstra Corporation Ltd (ASX: TLS) have been hammered over the past few months as the market questions the company’s dividend-paying ability. The NBN will perhaps have the biggest impact on Telstra, with the company claiming it will cause a $2 -$3 billion negative hit to EBITDA. It is unclear how, or if, the company will make up for this shortfall so it can continue to pay its generous dividends.

TPG Telecom Ltd (ASX: TPM) shares have fallen by more than 31% since disappointing the market with weaker than expected guidance for FY17. On top of this, the market is questioning TPG’s ability to grow without further acquisitions. The sector has gone through a period of significant consolidation, much to the benefit of TPG. With the number of potential targets now limited, investors are unsure if the company will be able to justify its lofty valuation through organic growth alone.

Once a market darling, Vocus Communications Limited (ASX: TLS) has suffered the biggest falls over the past few months thanks to heavy insider selling and the departure of its long-serving CFO. The market is now questioning whether its merger with M2 Group is progressing as smoothly as anticipated and whether there could be further disruptions to the management team in the short term.

Should you buy?

Although all three companies have already suffered pretty big falls, I’m not convinced that the worst is behind us just yet. Even today, the sector is underperforming, with TPG suffering a near 5% fall.

With that in mind, if I had to select one company to buy today, it would be Vocus. The company has the brightest outlook of all three companies, in my opinion, and the shares trade on an attractive forward multiple of just 15x.

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Motley Fool contributor Christopher Georges owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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