S&P COMMUNICATION SECTOR MAY LOSE SHINE
Several highest fliers face regulatory risks
THE mash-up of old and new media may not be a winning combination for the new S&P communication services sector as its highest fliers face regulatory threats and challenges to user growth.
The reconstituted sector, which debuted at the end of September, includes telecom, internet, media and entertainment companies, such as AT&T Inc, Walt Disney Co and Twitter Inc.
Three of the five momentum stocks collectively known as FAANGs — Facebook Inc , Netflix Inc and Google parent company Alphabet Inc — make up roughly half of the new sector by market capitalisation.
Facebook and Alphabet moved to communication services from the technology sector. Netflix was previously in the consumer discretionary sector. The other FAANG stocks, Amazon.com Inc and Apple Inc, remain in the consumer discretionary and technology sectors, respectively.
The addition of several FAANG stocks, among the fastest-rising shares on the S&P 500, has brought more attention to the once-sleepy sector, formerly known as telecom.
Indeed, so far communication services has closely tracked the tech sector. Both have slid significantly during selloffs in October, including a 5.3 per cent drop for the S&P 500 over Wednesday and Thursday.
The two indexes recovered somewhat in trading on Friday. The communication sector was last down 5.3 per cent month-todate, ahead of tech’s 6.2 per cent slide.
On one hand, the communication sector’s old-media names have cushioned it somewhat in comparison to tech’s steeper plunge. But those less growthoriented companies also limit the sector’s upside potential.
Also, several of the sector’s growth companies — Facebook, Alphabet and Twitter — face regulatory risks that tech companies do not. Recent disclosures of privacy breaches have increased concern among some investors that the US government could soon target Internet companies with new regulations.
“The regulatory pendulum tends to swing from ‘not enough’ to ‘too much’, and it will take time to balance,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute in St. Louis. “In the meantime, we have to think about overregulation.”
As a result, market strategists have been less than enthused. On Monday, Wells Fargo Investment Institute gave the sector an “unfavourable” rating. Bank of America Merrill Lynch and RBC Capital Markets rate the sector “underweight”.
On Monday, Google announced that private data from 500,000 users of its Google+ social network, whose consumer version is being shut down, may have been exposed to external developers.
On September 28, Facebook said hackers had stolen digital login codes allowing them to take over nearly 50 million user accounts.
Executives from Facebook and Twitter had testified before Congress last month on their companies’ data security practices.
Another communications highflier, Netflix, faces a separate challenge. Its shares dropped 5.2 per cent on July 17 after the company’s rate of international subscriber growth in the second quarter underwhelmed investors. Another disappointing number for international growth could alarm investors, said Daniel Morgan, senior portfolio manager at Synovus Trust Co in Atlanta.
“That would be a concern because Netflix is so dependent on the international side in terms of its growth,” Morgan said. “The domestic side has become pretty mature.”
Netflix is scheduled to report its third-quarter results tomorrow.
Given the risks to the communication sector’s Internet stocks, the sector is less attractive than technology or consumer discretionary for investors seeking growth, said Wren.