Like any investor, you're trying to beat the benchmark S&P 500. There are no two strategies alike to do so, but for Charlie Smith, the answer may be in a fairly unlikely place: Telecom and cable stocks. The sector normally viewed as defensive is ripe with opportunities for gains, according to the co-founder and CIO of the Fort Pitt Capital Total Return Fund (FPCGX) --a fund with a five times overweight position in Telecom/Cable.
"The only way you're gonna out perform the S&P is to be different from the S&P," Smith says.
Breakout's Matt Nesto asked why he's still bullish on the likes of cell phone carriers and cable giants. Smith said he sees cash flows increasing despite high subsidies on equipment like Apple's (AAPL) iPhone.
"As these subsidies roll off on the new handsets, the base CAP-EX for Verizon (VZ), AT&T (T), and Comcast (CMCSA), is shrinking as a percentage of revenues," he explains. "So the free cash flows for these companies are gonna be improving quite significantly over the next couple of years."
Part of that cash flow has come from an average revenue per user that has climbed across the board for the three companies. In the third quarter of 2011 Verizon wireless recorded an ARPU of $54.89 and AT&T $63.69. For Comcast that number was $138.58. But Smith believes the days of that growth are numbered.
"We're starting to see the competition aggressively address the bundling, and the idea that if your bundle is pushing north of $100, $120 a month maybe it's something you need to take a look at," he says. "I think we're gonna see the CAP-EX number begin to moderate and that's gonna be where the cash flow growth comes from."
And in a prime case of addition by subtraction for the bottom line, Smith says, "the gear that the companies have to buy to take of advantage of the physical spectrum is getting cheaper every year and that's really the key issue here."
For the wireless providers Smith thinks the cash will lead to annualized dividend growth of three to five percent over the next several years and "that certainly should keep a floor under the stock."
As for Comcast, Smith says they are battling growing competition from internet-delivered video (or "over the top video" as he calls it) the right way. The cable provider recently inked a 10-year deal with Disney (DIS) to lock up perennial favorite ESPN as well several other properties. The deal also includes content distribution to mobile devices like iPads.
Do you think moves like that save cable? And can they make you money in our increasingly digital world?
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