Can telecem sector stocks be contrarian bets?

Not much has changed in my bearish views about the telecom sector stocks since I wrote the previous post a little over a year back. The Sensex and Nifty are in bear markets – so are most of the telecom stocks. But there are always a couple of stocks in every sector that flow against the tide. The telecom sector is no exception. But the answer to the question is: No.

The 2G scam has not yet reached a denouement, except that the former telecom minister and his cohorts are still enjoying free lunches, but behind bars. Those who bid too high in the 3G auctions tried to cut their losses by circumventing auction conditions by sharing resources. The headwinds in the sector remain strong.

Horizontal dotted lines on the two year bar charts below represent price levels at the time I wrote a bearish post back in Oct ‘09.

MTNL

The MTNL stock chart shows why the government should concentrate on making policies that enable businesses to prosper, but not be in business. A monopoly in the lucrative Delhi and Bombay markets couldn’t help the company to gain any competitive advantage. The stock is falling further in a bear market. Avoid.  

Bharti Airtel

Bharti Airtel is the leader in the telecom pack. After dropping to a low of 254 in Jun ‘10, the stock had been in an up trend that reached a peak of 445 in Aug ‘11. The bears decided enough was enough. The stock has fallen below its 200 day EMA, the blue up-trend line and is just about hanging on to the two years old price level of 359. A drop to 325 is possible. Hold.

Reliance Communications

The Reliance Communications stock has lost 75% from the two years old level of 282 to its recent low of 69 – and may drop lower. The only hope for shareholders (those poor souls who are still hanging on) is if ‘big brother’ bails out ‘little brother’. Do not touch with a 10 ft pole.

Idea Cellular

In my previous post, Idea Cellular was recommended as a contrarian play, and is the only stock to make some gains in the past two years. Though technically in a bull market, the good times seem over for now. Book profits, or hold with a strict stop-loss at 80.

Tata Teleservices (Mah.)

Tata TeleServices is at a critical support level of 14. All efforts at rallies have been met with selling by bears. If 14 is broken – and the probability is high, it may become a penny stock. Avoid.

Subex

The stock of Subex had made a good recovery and was forming the handle of a possible cup-and-handle bullish pattern. Only, the handle turned into the first leg of a down trend that has pushed the stock price deep into a bear market. The stock has lost 70% from its Nov ‘10 high of 95 to the recent low of 28. THe market has punished companies with high debt. Avoid.

OnMobile Global

The OnMobile stock has been pummeled out of shape – an example of how sentiments can play havoc with a fundamentally strong stock. For the past few months, the stock has been consolidating within a rectangular band between 54 and 73. There is a good possibility of the stock trying to form a bottom here. This can be a contrarian bet, but with a strict stop-loss at 52.

Geodesic

The Geodesic stock was a favourite of small investors in the previous bull market – thanks to the presence of the ‘RARE’ bull. But I could never figure out how they were making money (in spite of working in the IT industry for almost 30 years). The company has spun a web of subsidiary companies – many of which are located in tax havens. “Daal may zuroor kuchh kaala hai”! THe stock is falling deeper into a bear market. Stay far away.

Tanla Solutions

Tanla was falling deep inside a bear market when I looked at it a year back. The chart is an example of how a stock which has already fallen a lot can fall much further. It has become a penny stock. Avoid.

MRO-Tek

MRO Tek has also turned into a penny stock in spite of being around for more than two decades and being in the growing telecom and networking hardware business. Those who trade in this stock are either very brave or very foolish. Volumes indicate that their numbers are quite small. Don’t touch it.

Related Post

Should Indian investors switch out of Telecom Sector stocks?

Stock Chart Pattern - Bharti Airtel (An Update)

The previous update of the stock chart pattern of Bharti Airtel was written way back in Jan ‘10. Prior to that, I had written a post in Oct ‘09 advising investors to switch out of telecom sector stocks. Despite growth in subscribers, low ARPUs, competition from overseas players with money power, and the likely high cost of the impending 3G auction were the reasons for my bearish view at that time.

Bharti’s stock had been an outstanding performer, giving multibagger returns to savvy investors who had entered early. Customer service was the best among the various service providers. The management was aggressive and clued on. But all sectors eventually mature. The fast growth of the early years tend to slow down to more stable and sustainable levels. Bharti was no exception.

The charts began to reflect the ground realities. The stock reached a high of 495 (adjusted for the subsequent 2:1 split) on May 19 ‘09 – thanks to the post-election market euphoria – but failed to test its Oct ‘07 top of 575. After a sharp correction, followed by a sideways consolidation, the stock attempted another rally – only to reach a lower top of 467 on Oct 1 ‘09. Combined with the fundamental headwinds, the weakness in the chart pattern confirmed that worse was to follow.

The bar chart pattern of Bharti Airtel from Jan ‘10 onwards shows that the worst may be over for shareholders, but there are technical hurdles that need to be crossed:

The stock continued to fall below its 200 day EMA after my previous post on Jan ‘10, till it fell below its Mar ‘09 bear market low of 272 and made three bottoms at 254 in quick succession (two in May ‘10 and one in Jun ‘10). An upward spike above the 50 day EMA on decent volumes was followed by a bullish rounding bottom pattern. A high volume spike took the stock above its 200 day EMA.

The subsequent rally reached a high of 376 on Sep 28 ‘10. Note that the ROC and RSI made lower tops (marked by blue arrows) while Bharti’s stock moved higher. The inevitable correction turned into a 6 months long sideways consolidation till Mar ‘11. The sharp rally in Apr ‘11 did not have volume support. The ROC and RSI were making lower tops (blue arrows). The negative divergences once again stalled the rally.

The high volume spike on May 6 ‘11 touched an intra-day high of 400.10 before closing lower than the previous day – a distribution day. The rise from the low of 254 to the high of 400.10 retraced 60.6% of the fall from 495 (May ‘09) to 254 - close to the Fibonacci retracement level of 61.8%. The stock needs to clear 400 convincingly (i.e. by at least 3%), and then cross the previous tops of 467 and 495 before the bulls can regain control.

The technical indicators are not conducive to bullishness. The MACD is positive, but falling below its signal line. The ROC is just above its 10 day MA, and barely positive. The slow stochastic is below its 50% level. Only the RSI is showing some bullishness by rising above its 50% level.

Shareholders who heeded my advice and sold the stock on Oct 7 ‘09 (it touched a high of 367.70 and closed at 358.35) would have made more money even if they kept the cash in a savings account. At today’s closing price of 369, the stock has gained less than 3%.

Bottomline? The stock chart pattern of Bharti Airtel is back in bull territory, but not yet out of the woods. Without a doubt, this is the best stock among the telecom service providers. But its glory days are behind it. As an investor, you always have choices. If you are going to invest in a slow growth, stalwart stock – would ITC or Dabur be better bets?

(My friend, Nishit, didn’t agree with my bearish view about Bharti and wrote a well-argued opposing view: http://investmentsfordummieslikeme.blogspot.com/2010/07/bullish-case-for-bharti-airtel-guest.html. What are your views about Bharti, dear reader? Are you bullish or bearish? Why?)