As 2022 comes to a close, many folks have endured the most challenging investing year of their lifetimes. The S&P 500 and Nasdaq Composite are both in a bear market and on track to notch their worst calendar year performances since 2008. And many experts are calling for more pain ahead next year.
A MarketWatch survey of 18 investment banks concluded with a 2023 S&P 500 consensus target of just 4,031, with many Wall Street banks expecting the S&P 500 to have a rocky first half of the year and recover in the second half. The CBOE put/call ratio, which provides a reading on investor sentiment, just posted its highest reading since the COVID-19 pandemic. Buying put options is a bet that that market will keep falling, while buying calls is a way to bet on the market going up. A high put/call ratio indicates more pessimism than optimism.
If the S&P 500 posts another down year in 2023, it will mark the first time since 2002 that the market has recorded two consecutive down years.
Image source: Getty Images.
Inflation is showing signs of slowing down. But even if inflation comes down, a continued slide in the housing market and rising unemployment could still trigger a recession. With so much uncertainty in the air, it can be intimidating for investors to hit the buy button.
Although the sell-off has spurred an excellent buying opportunity for many industry-leading companies, the communications sector stands out as a particularly good place to invest in 2023 and beyond. Here's why.
Breaking down the communications sector
When investors think of the communications sector, they may think of telecommunications companies like AT&T (T -1.37%), T-Mobile (TMUS -0.08%), and Verizon (VZ -0.68%) -- as well as entertainment players like Walt Disney (DIS -1.01%), Netflix (NFLX 1.74%), and Comcast (CMCSA -5.82%).
And while those companies certainly make up a large portion of the sector, Google parent company Alphabet (GOOG -1.96%) (GOOGL -1.97%) and Facebook parent company Meta Platforms (META -10.56%) actually make up over 45% of the Communication Services Select Sector SPDR Fund(XLC -3.56%) at time of writing, which is the largest communications ETF by net assets (even though many investors may think of Alphabet and Meta as being tech stocks).
The price-to-earnings (P/E) ratio of the Communication Services Select Sector SPDR Fund is just 15.1, and the price-to-free cash flow ratio is 14.3 -- both well below the S&P 500 averages of 18.4 and 17.6. The index also has a dividend yield of 1.1% -- despite large holdings like Alphabet, Meta, Netflix, and Disney (which don't pay dividends) -- compared to an S&P 500 dividend yield of 1.5%.
Not only is the index as a whole less expensive than the S&P 500, but it also has arguably higher growth too. Trends in streaming, the metaverse, social media, entertainment, advertising, and other industries all cross through the communications sector. The shift from linear networks and traditional advertising to new methods is a massive growth opportunity. Throw in the stability offered by value stocks with high dividend yields like Verizon, and the sector offers a nice balance.
A dire downtrend
One of the reasons the valuation of the communications sector looks so attractive is that many of its top holdings are down big off their highs. Meta, Netflix, and Disney are all down over 55% from their all-time highs. Alphabet is down just over 40%. And the major telecom stocks have underperformed the market for years.
All told, it's been a brutal year for the communications sector. And believe it or not, the sector also happens to be the worst-performing sector in 2022, 2021, and over the last three-year period despite being the third-best-performing sector in 2020.
|
Sector |
Three-Year Total Return |
2022 Total Return (As of 12/26/2022) |
2021 Total Return |
2020 Total Return |
|---|---|---|---|---|
|
Energy |
68% |
64% |
53% |
(33%) |
|
Technology |
37% |
(28%) |
35% |
44% |
|
Healthcare |
39% |
(2%) |
26% |
13% |
|
Materials |
35% |
(11%) |
27% |
20% |
|
Consumer staples |
28% |
0% |
17% |
10% |
|
Industrials |
25% |
(5%) |
21% |
11% |
|
Utilities |
21% |
2% |
18% |
1% |
|
Financials |
17% |
(11%) |
35% |
(2%) |
|
Real Estate |
5% |
(26%) |
46% |
(2%) |
|
Consumer discretionary |
3% |
(36%) |
28% |
30% |
|
Communications |
(11%) |
(38%) |
16% |
27% |
Data source: YCharts.
The communications sector has it all
If the past few years have taught us anything, it's that beaten-down sectors are usually worth buying. The three worst-performing sectors of 2020 (energy, financials, and real estate) were the three best-performing sectors of 2021.
The communications sector isn't out of the woods yet, as a full-blown recession will have a major impact on advertising revenue and likely cause customers to cut discretionary spending on streaming and cable packages and big-ticket trips to Disney World.
But with so many quality holdings, growth prospects, and a discounted valuation relative to the S&P 500, the communications sector stands out as a compelling buy for 2023.
