The market saw interest rates rise in the second quarter on expectations that the Federal Reserve is ready to raise interest rates soon. Wall Street pundits see the rate increases starting anywhere from September to December to not until 2016. A new report from Merrill Lynch makes the case that so-called rate trade stocks that were bond proxies during the years of a low-rate environment may have seen unwarranted sell-offs and could be ready to trade higher.
The Merrill Lynch team notes in the report that numerous investors that they have spoken to recently take it as given that the telecom stocks have a significant negative correlation with interest rates. That is an interesting position given the fact that the S&P telecom stocks actually outperformed the market by 0.6% during the period of rising interest rates.
While the analysts see the rural local exchange carriers (RLECs) best positioned to rebound during the last half of 2015, owning a large cap leader is a good idea as well.
This company will report quarterly results on July 23, and the Merrill Lynch team sees upside to current forecasts. AT&T Inc. (NYSE: T) has to be one of the most ignored dividend plays on Wall Street. In fact, AT&T is the third most underweighted security, and the most underowned by active fund managers, according to Merrill Lynch data. While growth has been admittedly slower over the past few years, the company continues to expand its user base. Strong product introductions from smartphone vendors has not only driven traffic, but increased device financing plans. That is an area that many on Wall Street believe could lead to some earnings weakness.
Many on Wall Street also think the closing the DirecTV deal will remove a lot of lingering questions, especially where the company’s big dividend is concerned. It is a good bet that the synergies created by the deal are being underestimated by Wall Street, and many analysts see upside to wireless margins.
The Merrill Lynch team notes that AT&T will host a full analyst day and they believe the company will highlight growth projections, strategic initiatives and offer a full pro forma look at AT&T/DirecTV combined company. The company’s increased involvement in Mexico is also cited as a positive for future earnings.
AT&T investors are paid an outstanding 5.4% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus estimate is $36.74. Shares closed Wednesday at $34.73.