What is the communications sector?
It includes fixed-line and wireless providers, social network companies, cable, media and content providers.
The Communication Services sector is concentrated in a handful of cutting-edge companies with which nearly all Americans have contact on a daily basis—including search engine and social media companies, streaming services and wireless telecommunications companies.
So far, COVID-19 has had a modestly positive impact on the sector, as some bigger companies within the key segments have had a tailwind from stay-at-home orders, which have increased demand for streaming entertainment. However, there has been a mixed impact on integrated telecom, as those with primarily wireless product line have far outpaced those with business land-line services, which are expected to be negatively impacted by the recession. Meanwhile, multimedia, theme parks and traditional advertising-focused broadcasters have faced significant headwinds.
The larger companies that enjoy significant competitive advantages due to their dominance in their respective business lines—search engine, social media and telecom—also face emerging antitrust risks. The rollout of fifth-generation (5G) cellular wireless technology could increase demand, as 5G is expected to increase speeds and allow for more exposure to the “Internet of Things” and automated car technologies—increasing growth potential. However, upgrading networks will require substantial capital investment.
There is clearly a confluence of positives and negatives to consider from a qualitative perspective. When we assess the pros and cons through a more quantitative lens, we have a similarly mixed picture. The sector has been more sensitive to overall market moves historically, so a continued rally from the March 2020 lows would be a macro tailwind. In terms of relative valuations, the few individual companies that compose more than 50% of the sector are difficult to assess. And the current Communication Services sector was launched in 2018—it replaced the narrower Telecommunication Services sector—so a comparison against the sector’s own history is not practical. We can compare some of the fundamentals—such as return on equity and earnings revisions—with other sectors, and they are about average for the group. Keep in mind, however, that sharp volatility in the markets, earnings expectations and the economy makes assessing valuations and fundamentals difficult.
We believe that many Communication Services companies face unique risks, but their strong competitive advantages within the industry also afford them potential rewards. However, balancing that against macroeconomic, value, fundamental and relative strength factors is neutral, in our view.
Sector Overview: Communication Services
Note: Each of the sector indicators shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.
Source: Charles Schwab, as of 05/21/2020.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Communication Services sector.
* As represented by the S&P 500 index
What You Can Do Next
- Review your sector allocation. If you aren’t sure how to analyze your sector weightings, a Schwab Financial Consultant can help.
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