Spain's Telecom Giant

November 24, 2009

Welcome to another edition of Stock of the Week, a FREE eletter sent out each Tuesday containing my in-depth analysis on the stocks that matter to you most—with no mysteries and no strings attached. (View complete Stock of the Week archive here.)

Many of you have emailed me asking for international stock picks lately. Two weeks ago, we covered my favorite China oil stock. Then last Tuesday, I updated you on my top Chinese Internet company. These two picks are really booming right now and capitalizing on the explosive profit potential of this emerging market.

But profit opportunities are not limited China. In fact, I have a real gem of a stock for you this week in a place that many are overlooking right now: Spain’s telecom industry.

Remember, each week I cover stocks that you want to know about. So drop me a line at stocks@navelliergrowth.com and let me know what stocks or industries you’re thinking about. You can be specific, like Svante W.’s recent request to discuss Nokia (NOK), or you can be general like Arnold M. who emailed me asking for my favorite global telecom play.

It’s important to me that this weekly eletter is valuable to you and that we talk about companies that impact your portfolio, so please don’t hesitate to contact me. I can’t cover every stock that’s submitted, but I try to cover those that are the most popular at the time.

Svante and Arnold were part of a group who are curious about telecommunications companies, so this week I’ll cover one of my favorite telecom picks right now—and one to avoid.

The best telecom stock you’ve never heard of

I’ll cut right to the chase for you, Arnold: Nokia (NOK) is in trouble and should be cut from your portfolio. My in-depth fundamental analysis of this company shows a rather brutal trend, with the worst possible ratings for earnings growth, earnings momentum and earnings surprises. In October, the company reported a net loss on a nearly 20% drop in sales, sending shares of this Finland-based telecom company tumbling by double-digits in just one day.

The reality is that to succeed in this highly competitive industry, you need to hit all the right notes. A successful telecom pick has to connect with gadget geeks with trendy gear. and plenty of flash, but at the same time appeal to information junkies that demand reliable service, ease of use and multifunctional tools. Oh, and by the way—you have to do it at competitive pricing because consumers are strapped for cash.

This is a very tall order, so I don’t fault Nokia for falling short. Many telecom companies are struggling right now. But there are a few industry standouts firing on all cylinders that are terrific buys. In fact, one of my favorite telecom stocks right now is a Spanish company you probably have never even heard of: Telefonica (TEF)

Let’s break down this pick using my two metrics of a stock’s health: its current strength and its future growth potential.

Current Strength: Telefonica provides Internet access and phone services across Europe. Based in Madrid, the company boasts about 150 million residential and business customers worldwide. The company took a bit of a hit with the rest of the telecom industry over the last year, and in its latest quarterly report, it indicated that times are still a bit tough. TEF’s third-quarter numbers indicate sales were down about 8% in its core Spain operations. However, profit fell less than 1% year-over-year thanks to strong international growth, particularly in emerging markets.

Future Growth: I see the lackluster earnings reported by Telefonica in early November as a massive buying opportunity. Why? Well, because while TEF took a big hit in Spanish sales in 2009, it has made it clear that the future of this company lies beyond Europe and is making a big push to go global. It recently made a merger play for Brazil telecom company GVT Holdings, but was outbid. Though the company said it has no plans to make another buyout move, the bottom line is that TEF already has a very Latin American flavor to it. It owns a 50% stake in Vivo Participacoes (VIV), Brazil’s premier mobile phone operator, and a similar stake in fixed-line provider Telesp. This allows it to capitalize on booming international growth even while domestic sales in Spain stay sluggish. What’s more, the euro continues to surge against the dollar—trading at about $1.50 recently. Favorable currency exchange rates from this trend will naturally boost profits for this Spanish telecom giant as it does more and more business abroad.

The Verdict: The investment community has been clamoring over emerging markets. But rather than take a gamble on a company listed on a foreign exchange or a micro-cap company that is very volatile, why not invest in this stable European blue chip that has all the punch of an emerging market stock but with less risk? While Spanish operations for TEF may be stagnant, the reality is that it’s only a matter of time before this multinational company derives the lion’s share of its profit from emerging markets like Latin America. That makes Telefonica a great buy right now in anticipation of future growth. And the icing on the cake is that TEF yields a very nice dividend of $4.45, which will give investors who buy this stock an added boost.

You pick our next Stock of the Week

Whether you’re looking for a great international stock or looking for the next big telecom play, Telefonica (TEF) fits the bill perfectly. I rate this company a strong buy in my Portfolio Grader stock-ranking tool, and advise all investors to jump into this stock immediately.

As for which specific companies we’ll cover next Tuesday in my Stock of the Week newsletter, it’s up to you! Email me at stocks@navelliergrowth.com, and I’ll give you my complete outlook on your favorite stocks. Just remember to include your name and the ticker symbol of the company that’s on your mind.

In the meantime, I strongly encourage you to monitor your stocks via my free Portfolio Grader stock ranking tool. I break down about 5,000 companies on Wall Street over eight fundamental criteria. These factors measure a company’s current strength through items like cash flow, margin growth and return on equity—as well as predict a stock’s future outlook via sales growth and earnings revision. What’s more, Portfolio Grader also provides “best by sector” lists that name my top three picks in any industry. As you’ll see, Telefonica tops my list of the best telecom service stocks right now.

I look forwarding to hearing from you, and I’m sure we’ll have more great stock picks to discuss next Tuesday, December 1. Until then, take care and happy Thanksgiving!

Sincerely,

Louis Navellier

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