One technology in the investment world that’s drawing attention and excitement is 5G — which stands for fifth-generation wireless. Not a day goes by when I don’t see a story about 5G and how it will transform the world. There’s endless lists of what stocks I should buy that are related to the new standard.
New indices and exchange-traded funds are rolling out to cash in on the hype. They track 5G and its related hardware, software and service companies.
Take for example the 5G Frontier Index, which Credit Suisse made available to the public last year.
Source: Chart by Bloomberg, Credit Suisse
Credit Suisse 5G Frontier Index
The index reps the name of a major global bank, but its total gain is a mere 7.5%. That trails the S&P 500’s price peak in late January. And with the volatility in the markets, the index is down 10.4%.
The good news is that there are plenty of genuine 5G companies and stocks, which I have been recommending in my Profitable Investing model portfolios.
And with the market mayhem, there are some good bargains right now.
But before I explain what you should buy and own, let’s look at what 5G is doing now and what may follow.
Evolution, Not Revolution
As noted earlier, 5G stands for fifth-generation wireless. Now, I’ve had mobile phones since either 1989 or 1990. I’ve had Motorola bricks and now a BlackBerry, made under license by TCL Technology. The Motorola phones were on the old analog frequencies and were only good for voice with limited range in coverage and power. And I recall the billing — especially when roaming.
AT&T (NYSE:T) was one of the first digital wireless providers, operating initially through a partnership with SBC Communication. At the time, I was in St. Louis and was an early adopter, grabbing one of the smaller devices. Then these devices evolved into the early smartphones, including the 2G Palm models. Those were transformative as email and rudimentary web access were instrumental for businesses.
The next big shift was in 3G. The transition brought spotty coverage and shifts back to 2G. And to make it worse, wireless had its own VHS-Betamax battle between global system for mobile (GSM) and code division multiple access (CDMA).
AT&T adopted GSM, while Verizon (NYSE:VZ) used CDMA. Both AT&T and Verizon are in my Incredible Dividend Machine Portfolio. But 3G also brought wireless modems, and I had units for both GSM and CDMA.
Having two modems wasn’t a big deal for my phone. But it did make working outside the U.S. a mess. The world largely used GSM, which AT&T matched to allow roaming. But AT&T had lousy coverage in cities including New York and San Francisco. Verizon covered those two cities much better.
My solution? I had a series of Verizon phones with switches and dual sets of radio chips for inside the U.S. and out. This didn’t work well at all.
Next we had 4G (also known as long-term evolution or LTE), which provided a path for GSM and CDMA to converge. But again, the transition was rocky. This is where BlackBerry (NYSE:BB) devices really came through, as they encrypted and compressed data. I had access to data through my BlackBerry even when others around me didn’t.
Next Stop: 5G
Now we finally come to 5G, from which we expect two things. The first is a step up in speed and capacity. The second is shorter latency — which is the time it takes for a wireless device to make the connection needed for data to flow. For example, it’s how long it takes for a website to begin to load.
The new speed and capacity will be very nice. It will be easier to download and share photos. And it will also allow me to submit my articles and other work much faster.
But it’s shorter latency that will power all sorts of new things. This list includes autonomous cars and systems for accident avoidance. It should also provide better wireless than current Wi-Fi.
It’s important to note that 5G is still evolving and won’t be a quick switch. Even the most advanced wireless market in the world — South Korea — is seeing resistance from adopters citing unstable signals and a lack of improvements. In addition, the new handsets and modems are quite rare and are still expensive.
True 5G, known as millimeter-wave 5G, is not really here yet. In the meantime, carriers like AT&T and Verizon are rolling out 4G-like offerings under the 5G label. True millimeter-wave tech is severely limited by distance and objects that block transmission, like walls and buildings. This means two things for now.
The first is that millimeter-wave tech is located for now in sports stadiums and other public venues that have mass appeal. The second is that the world will need vastly more antennae to make this true 5G work. The costs from this are constraining the rollout. But this situation is also providing additional opportunities to cash in on the evolution of 5G.
Right now, I see four groups of companies that are currently benefitting from the transition. Within these groups, I see eight great 5G stocks to buy now.
The Carriers (T, VZ, BCE)
First up are the providers of wireless. AT&T and Verizon are rolling out their own data plans for 5G. These plans have higher rates than those for 4G, so they should bolster revenues over time. But competition is also out there.
T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) are waiting to merge, as a collection of lawsuits weigh the deal down. I anticipate seeing it go all the way up to the U.S. Supreme Court, and that the pair will receive a favorable federal ruling. But in the meantime, T-Mobile is aggressively marketing its version of an evolving 5G. This will limit pricing power for AT&T and Verizon.
AT&T is absorbing Time Warner, buts its revenues are still ascending at an annual rate of 6.4% despite cord-cutting losses from its satellite and cable units. Wireless is its biggest source of revenue, so 5G should only boost its revenues more.
But there’s something to note. AT&T, like Verizon, is making capital expenditures which will weigh on profits and debts. The company has been working on reducing debts, and its operating margin is good at 15.3%. However, its return on equity is a bit lower at 8.9%, reflecting some of its added costs. But T stock is a value at 1.4 times book and 1.4 times trailing sales. It remains an attractive buy in a tax-free account, especially with its 5.9% dividend.
Verizon is a purer play on 5G, with revenues from wireless dwarfing its other units. Its revenues are expanding at 3.8% a year, slower than those of AT&T. But, its operating margins are better at 17% as its return on equity runs at 28.4%. Unlike AT&T, the stock comes at a high cost and a 3.7 price-book ratio and a 1.7 price-sales ratio. Its 4.4% dividend still makes it another 5G stock to buy in a tax-free account.
BCE (NYSE:BCE) is also in my Incredible Dividend Machine portfolio, and I see it as the Canadian version of AT&T with its combination of communications and content. While its wireless business contributes a smaller overall percentage of revenue, it is still important for 5G rollout in Canada. Its revenue grew 3.1% over the past year, in line with Verizon. Its operating margins are at 22.9% which helps the return on equity of 17.6%.
BCE stock yields an ample 5.6% which continues to rise over time. The stock is reasonably valued at 3.2 times its book value and 2.3 times sales. It is a buy in a taxable account given that it is a Canadian stock.
Equipment (ERIC, SSNLF)
The 5G rollout is requiring lots of new equipment. Huawei and ZTE (OTCMKTS:ZTCOY) are Chinese-based companies on the forefront of this 5G equipment. But politics is hindering their business in the U.S. and in all markets tied to the U.S.
But not to worry, my Niche Investments portfolio already holds two fierce competitors. Those companies are Samsung Electronics (OTCMKTS:SSNLF) and Ericsson (NASDAQ:ERIC).
Ericsson’s European roots are hindering the company, as it faces regulatory, tax and labor challenges. As a result, its revenues are only growing 2.7%. It should tap the little debt it has to ramp up 5G product development.
Regardless of its challenges, ERIC stock is a value at 1.1 times trailing sales and 3 times book value. Its dividend is an unfortunate 1%. All of this puts it in my Niche Investments category, as it has lots of value and opportunity in a market where capital spending is ramping up. It is a buy in a taxable account given its foreign listing.
Samsung Electronics has long been one of my favorite investments. It is one the leading tech companies in South Korea and in the global market. There are very few devices that don’t have at least one Samsung component.
Source: Chart by Bloomberg
Samsung Electronics Total Return in USD
And over the past ten years, the stock has delivered a return of 286.3% for U.S.-based investors.
One challenge that Samsung faces is lower prices for memory chips around the world. That said, its revenues have been improving by 10% over the past year. Its operating margins come in at 12.1% and its return on equity is good at 8.8%.
The dividend yields 2.6% which is good for technology. Combined with a price-sales ratio of 1.4 and a price-book ratio of 1.3, SSNLF stock is a buy in a taxable account given its foreign listing.
Behind-the-Scenes (MSFT, DLR)
There’s a lot going on behind the scenes. Companies will use more computing power as data moves across the globe on 5G’s evolving networks. This brings two companies inside my Total Return portfolio into play.
Microsoft (NASDAQ:MSFT) has its hands in a great deal of relevant networking and computing software. The stock was super successful in 2019, returning 57.6%. And since I added it to my model portfolio it has returned a whopping 598.4%. That’s an annual equivalent return of 31.6%.
Source: Chart by Bloomberg
Microsoft Total Return
Although it is not a pure 5G investment, Microsoft stock is an integral part of the evolution. And it will benefit big time with its Azure cloud services. MSFT stock is a great buy in a tax-free account.
As noted with Microsoft, cloud computing is very important to 5G networks. This means data centers — like those that Microsoft uses — are even more important. This brings in Digital Reality (NYSE:DLR), a real estate investment trust (REIT) that owns and leases data centers.
Its revenues are climbing 17.2%, fueling a great return on funds from operations, a metric that measures profits from actual properties. And while gaining in value, its price-book ratio is not far off the average (as measured by the Bloomberg U.S. REIT index).
DLR stock yields 3.5%, which like for all U.S. REITs has a 20% deduction in taxable income as part of the 2017 Tax Cuts & Jobs Act. This deduction makes the yield even more attractive on a taxable equivalent basis. It is a buy in a taxable account.
Location, Location, Location (WPC)
As I noted earlier, 5G needs a great number of antennae to work inside and outside of buildings. Now, there are companies with cell tower assets that currently carry 4G and other standard transmissions. But it is interesting to note that many tech investors are divesting from these companies.
Why? These companies are expensive and do not typically have attractive yields. But the biggest reason is behind how millimeter-wave 5G works.
I have been continuing to follow the development of new 5G antennae. And while I am not done, I have been learning a lot about the leases for antennae locations, particularly in lucrative markets. One of the lesser-discussed beneficiaries is a group of REITs that focus on urban commercial properties.
This includes my long-time favorite WP Carey (NYSE:WPC) from my Total Return portfolio. It is a great investment despite recent market volatility. It has returned 83.1% since I added it to my model portfolio, an annual equivalent of 10.3%.
WPC stock is a bargain buy as it is valued at less than 2 times its book value. And with a 5.3% yield it makes a good income generator in a taxable account.
— Neil GeorgeAvoid These Kinds of 5G Stocks Like the Plague [sponsor]
The 5G communication build-out is going to be the biggest, most important, most lucrative new “highway” built in our lifetimes. Yet most people are investing in it the WRONG way. Legendary stock picker Matt McCall reveals details about the best 5G stocks to buy now. Click here to learn more.
Source: Investor Place