Canadian telecom stocks are no longer for the faint-hearted. Despite concerns about a fading market for fixed telephone lines and intense competition for new wireless subscribers, the stocks have been enjoying a remarkable run recently, leaving little upside from here.
The S&P/TSX telecom services index, which consists of five names including BCE Inc., Rogers Communications Inc. and Telus Corp., is up 15 per cent this year. That wallops the measly 1-per-cent return for the benchmark S&P/TSX composite index. It also beats every other subindex within the composite, except for health care (a tiny group that has been swayed by the performance of one standout stock).
The gains shouldn't come as a complete surprise. About a year ago, sentiment toward the sector was somewhat bearish, given all of the competitive upheaval involving new wireless players and the threat of price wars. Telecom stocks languished amid strong gains elsewhere, making them attractive to anyone who was willing to bet that worries about splintering market share and shrinking profit margins were overblown.
Now, though, the reverse process is unfolding: Investor sentiment appears bullish after a number of strong earnings reports and rising dividends among key telecom companies.
In the case of Telus, the share price is now nearly $1 above the average target price from analysts - a rare example of analysts failing to keep up to a surging stock by jacking up their targets. BCE is a similar case, where the average target equals BCE's share price. And in the case of Rogers, the average target price is just 7 per cent above the share price, which is hardly gung-ho.
If analysts - normally a bullish crowd - are cautious about telecom stocks, should you be bullish? Contrarian behaviour is often a wise approach to investing, but in this case it doesn't make a whole lot of sense given the recent outperformance of these stocks.
Who knows, maybe there is an exciting round of consolidation coming. Or maybe enthusiasm for wireless products is about to explode in Canada, enriching all telecom players. But what's more likely, the big gains have already been made.