January 24, 2005
Traders will tell you that it's smart to buy when everybody else is selling. Just wait until folks are down on a stock, they say, and then scoop up it up at bargain prices.
You can bet that traders are taking a closer look at Verizon Communications (NYSE: VZ ) . Downgraded by a flock of Wall Street analysts earlier this month, the company has seen its stock fall by a dramatic 12% since the end of 2004. With the drop, Verizon -- a big component of the Dow Jones Industrial Average -- could turn a few traders' heads, especially ahead of its Q4 results, due out on Thursday.
Indeed, there are reasons to think it's time to push the "buy" button. Verizon Wireless, now the second-biggest wireless carrier, is expected to begin expanding at nearly twice the industry rate. With the healthiest balance sheet among the Baby Bells -- including accelerating revenue and cash-flow generation in the wireless business -- and unhindered by merger distractions, Verizon could conceivably raise its dividend this year.
That said, there are also plenty of good reasons why the stock has been under pressure lately. Earlier this month, the company said that its pension and other retirement costs would be higher than expected and that the sale of business units in Canada and Hawaii would dent 2005 earnings.
Likewise, over the longer term, the risks are high. Cable operator Comcast's (Nasdaq: CMCSA ) plan to roll out voice-over-IP services to 40 million homes could mean bigger-than-expected customer losses in Verizon's bread-and-butter business -- wire-line phones. Even worse for Verizon, the billions in fiber-optic-network investment that it will have to spend to fend off cable will bite into Verizon's free cash flow for years.
In the short term, the cheaper Verizon stock could make gains, thanks to strong results from its wireless and high-speed-Internet businesses. But if you take a longer view, you see that it's hard to make out any obvious upside. A glimpse at Verizon's cloudy prospects should be enough to give even the boldest investor reason to think twice.
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.