http://online.barrons.com/article/SB127327036437188547.html?mod=BOL_hpp_dc
Pounded Cable Stocks Look Like a Buy
THANKS TO AN AGGRESSIVE MOVE LAST WEEK by the Federal Communications Commission, the great 'Net Neutrality debate finally will be decided. And uncertainty over what the outcome will be has helped make some cable stocks look like a buy.
'Net Neutrality, for those just now waking from a long coma, is the principle that Internet service providers should treat all the types of information -- voice messages, music, e-mails, videos -- equally on their networks. The idea is that providers of broadband services, whether via DSL, cable modem or some other means, shouldn't be able to pick the kind of information that subscribers can access, even if some of those use much more bandwidth. Advocates of 'Net Neutrality don't want Comcast (ticker: CMCSA) , AT&T (T) or other access providers to have the right to tell you what to do with your Internet connection.
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A Bust: Errant computers and Europeans burned stocks from Apple to Nvidia. The Nasdaq Composite Index ended the week at 2,266 -- lower by 8%.
The Obama Administration is an avowed supporter of 'Net Neutrality. But it faces regulatory complications, amplified about a month ago, when the appeals court for the D.C. Circuit issued a ruling that left the concept of 'Net Neutrality in tatters. The FCC had tried to prevent Comcast from throttling down access speeds for customers attempting to access BitTorrent, a service for downloading videos, software and other files over the Internet. (BitTorrent remains a widely popular way to download pirated materials.) The circuit court somewhat shockingly found that the FCC had no jurisdiction to stop Comcast from blocking or slowing access to BitTorrent or any other services. In part, that decision reflected the fact that under FCC broadband-access rules -- and precedent in another case -- Comcast has been regulated under the Federal Communications Act's Title I, which covers information services, rather than under Title II, which covers communications services, or common carriers.
For the Obama Administration and the FCC, the ruling was something of a disaster, given their support for 'Net Neutrality. But FCC Chairman Julius Genachowski came up with what he and the commission think are a neat fix.
As he noted last week in a six-page missive now on the FCC Website (http://www.fcc.gov/), the general view has been that there were only two obvious ways to fix the issue. One would be through legislation; the other would be to change the designation of broadband access to Title II, and subject the service to the same rules and regulations that cover wired telephone service. But, as Genachowski conceded, forcing broadband companies to comply with the massively complex Title II regulations would do nothing for the administration's goal to foster wider access to broadband. Ergo, he came up with a third approach: reclassify broadband as a Title II service, but refrain from enforcing most Title II rules, other than those that would allow the FCC to ensure 'Net Neutrality.
News of the proposal hit the market Thursday, with stocks already under pressure from worries about the Greek debt crisis; the result was a massive selloff in cable company shares. They aren't the only affected companies, however. This also isn't so good for the telcos or the many broadband infrastructure companies that depend on growing capital spending by carriers, which might cut back if forced to abide by the FCC's desired rules.
Bernstein Research analyst Craig Moffett calls the decision to reregulated the sector under Title II the "nuclear option." "Reclassification would make all broadband service providers for the first time common carriers, potentially subjecting them to literally thousands of pages of regulations," he wrote in a research note last week. While Moffett noted in an interview that he is sure that Genachowski is sincere in his position that the FCC will forebear enforcement of many Title II regulations, he's not convinced that the chairman's promise mitigates the risks. He notes that forbearance could be revoked at any time by some future FCC members with a different agenda. His objections to the FCC's plan:
-- The legal basis for reclassification "remains uncertain."
-- Also uncertain is whether the courts will allow the FCC to forbear enforcement.
-- It's unclear if the reclassification would apply to wireless services. It's also unclear whether the FCC's approach could inadvertently open up information-service providers like Google (GOOG) to regulation under Title II.
-- Any appeal of the FCC decision would go through the same D.C. Circuit panel that already ruled that the FCC has no jurisdiction over broadband companies.
Perhaps even more troubling is Moffett's assertion that Title II reclassification could lead to "an extended period of profound regulatory uncertainty -- some might say chaos" -- that could last for years, until the matter is eventually decided by the Supreme Court.
All that said, I can't help thinking that the big selloff in cable stocks, which came on the day when the overall market had a short but terrible plunge, is a buying opportunity. The industry's capital spending is falling, resulting in surging cash flow, which is likely to be used for higher dividends, debt repayment, stock repurchases and other shareholder-friendly actions. Cablevision (CVC), for instance, was battered, despite a 25% dividend hike; the company nonetheless said it will look for ways to return more cash to holders. While there are certainly risks in the reregulation issue, cable outfits continue to gain subscribers for their digital video, telephony and broadband services. The FCC situation adds risks, but the stocks already discount them. Cablevision, Comcast, Time Warner Cable (TWC): They all look cheap to me.
IN THE NOV. 9, 2009 ISSUE, I wrote an enthusiastic squib about optical components supplier JDS Uniphase (JDSU), then trading a little north of $6. I theorized that it was likely to be driven into the double-digits by a pickup in demand for both optical networking components and related test and measurement equipment. Lo and behold, the stock almost immediately began a relentless climb that took it, as of the middle of last week, near $14.
But on the day of last week's great Grecian Burn, the stock hit an air pocket, and fell 20%, falling below $11, pressured by a weaker-than-expected March quarter financial report that showed unexpected revenue weakness in the test and measurement business. While that's certainly troubling, demand for the company's optical components is higher than ever. Indeed, the Street last week ratcheted up earnings estimates for JDS Uniphase.
If you missed the rally, here's your chance to get back in as the stock heads for the mid-teens.
