At least three high-grade sell-side analysts and one investor argue that a number of telecom credits have likely gotten ahead of themselves. Seven of the nine U.S. credits in the sector were trading through their 18-month averages last Tuesday, according to Doug Colandrea, head of high-grade research at Bear Stearns.
"We thought things were overdone on the downside. Now it appears that things may be overdone on the upside to justify the fundamentals," says Colandrea, who last week lowered his recommendation on the sector to marketweight from overweight
Similar reasoning will lead Fifth Third Investment Advisers to sell its $15 million holdings of the Sprint Corp 6% notes of '07 (Baa3/BBB-), according to Mitch Stapley, portfolio manager at the Grand Rapids, Mich. money manager. The bonds were bid at 90.5 last week, up some 15 points from mid-October. Stapley says a number of questions are still far from answered in the sector, such as whether WorldCom Inc.'s restructuring will give it a competitive pricing advantage versus the other long distance carriers. "It's not a bad time to comb through the portfolio and take a few profits and see what happens," he says.
Eli Lapp, analyst at BNP Paribas, urges investors to take gains in regional bell operators such as SBC Communications and BellSouth. "These bonds have rallied massively and deserve to be swapped here. The fundamentals for this business are still unsteady," he says.
SBC's 5.875% notes of '12 (Aa3/AA) were trading at 98 basis points above Treasuries last Tuesday, 47 basis points inside their Oct. 21 levels. BellSouth's 6% notes of '11 (Aa3/A+) were at 87--51 basis points tighter over that same period.
BellSouth and SBC are unlikely to gain much ground, argues Dave Novosel, head of high grade research at Banc One Capital Markets. However, he still has a strong buy on Sprint Corp. and AT&T Wireless. The latter credit still has plenty of cash, and no significant maturities coming due for the next three years. Sprint has also improved, though he says the name is a bit riskier. Sprint's 8.375% notes of '12 were bid at 94 last Wednesday morning. Novosel says he will likely place a hold on them if they trade to par. The AT&T 8.125% notes of '12 were trading some 400 basis points over the curve last Wednesday, and Novosel still sees room for another 100 basis points of tightening.