A strong value signal from cellular tower stocks
The powerful combination of increasing data needs and attractive valuations of cellular tower stocks can’t be ignored, contends Fidelity’s Sammy Simnegar.
- 01/31/2023
Amid investor trepidation about slowing global economic growth, a hawkish U.S. Federal Reserve, and the possibility of a recession in the U.S., cellular tower companies offer several desirable characteristics, according to Fidelity’s Sammy Simnegar.
“Firms in this segment are positioned to enjoy relatively steady long-term revenue and earnings growth, based on the ever-growing demand for bandwidth and the shift to 5G wireless networks,” says Simnegar, portfolio manager of Fidelity® Magellan® Fund (FMAGX)
The portfolio’s mandate is highly flexible, giving him the ability to invest in both domestic and foreign stocks across all market capitalizations and styles. In managing the fund since 2019, Simnegar favors high-quality growth stocks benefiting from long-term megatrends, as well as what he refers to as the three “B’s”—brands, barriers to entry, and "best in class" management teams.
In the current environment, consumers and businesses alike are always looking for ways to access more data, more quickly, he highlights, adding that 5G networks offer the most direct path to reach this goal.
Simnegar feels that companies operating in this business tend to have appealing financial characteristics, including excellent cash flow and a strong balance sheet.
Furthermore, once a cellular tower is built, he points out, the cost of maintaining and upgrading it is relatively low, compared with the revenue it brings in.
In addition to conventional cellular towers, the advent of 5G has opened up a related market in small-cell nodes—those low-powered antennas, typically installed on streetlights and utility poles.
“This technology, he explains, is needed to support so many applications used in our daily lives, including the dizzying expansion of the Internet of Things, autonomous cars, augmented reality, remote networks of transmitters, monitors, and a myriad of other devices.
Firms operating in this industry also have invested in small data centers to be located near small-cell nodes, as well as fiber-optic cable, says Simnegar.
Within the fund, he cites outsized holdings in American Tower (AMT) and SBA Communications (SBAC) as illustrative of this investment theme. Each stock came under pressure in early fall amid rising interest rates that fueled investor concerns about the companies’ debt.
“From what I can see, however, each has ample cash flow that projects to be more than sufficient to service debt and fund future growth,” emphasizes Simnegar.
Securities mentioned were fund holdings as of November 30. For specific fund information, including full holdings, please click on the fund trading symbol above.
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