Why Telecom Stocks Missed Monday's Market Rally

Stock markets continued to gain ground on Monday, with the Nasdaq Composite (^IXIC 2.02%) again leading the way higher. Gains for the S&P 500 (^GSPC 1.02%) and Dow Jones Industrial Average (^DJI 0.40%) were more modest but still showed the breadth of the upward move.

Data source: Yahoo! Finance.

Telecom stocks  held back some stock market benchmarks, with big declines for major players in the industry. Legacy issues from old-style landlines could cause massive problems for companies like Verizon Communications (VZ 1.17%) and AT&T (T 1.02%). With the full extent of potential problems as yet unknown, some investors were ready to sell now and ask questions later.

Big drops for telecom stocks

The damage to these two telecom leaders was extensive. Verizon shares were down 7.5% on Monday, while AT&T declined almost 7% for the day.

The latest move lower for the companies came after reports surfaced about the use of phone network cables containing lead materials. Lead is toxic, and concerns about contamination raised the specter of multi-billion-dollar class action lawsuits, as well as the prospects of massive fines from regulators down the road. In general, although landline cables are largely made out of copper, the reports suggest that the sheathing that surrounds and protects the copper cables could contain lead.

The irony, of course, is that Verizon and AT&T have largely shifted to wireless networks for voice and data, making their legacy landline assets largely obsolete. Yet some customers still use landlines, and more importantly, as the telecom companies look to decommission those landline assets over time, the need to take special care in handling lead-containing cables both above and below the ground will inevitably add to the already extensive costs involved.

Smaller stocks take even bigger hits

As big as the declines for AT&T and Verizon were, some companies had it worse. Lumen Technologies (LUMN), which was previously known as CenturyLink and has a sizable portion of landline assets in its account base, saw its stock drop 8%. Frontier Communications Parent (FYBR 1.37%), which has historically acquired considerable landline assets from AT&T and Verizon, took a 16% hit on the day.

Moreover, it's not as though things were rosy for telecom stocks even before the latest news came out. AT&T and Verizon have had to make massive investments in upgrading their wireless networks to the latest 5G technology, yet they also face significant competition from tech disruptors looking to make their business models obsolete. High dividend yields made Verizon and AT&T stock attractive to certain investors, but they also raised some concerns about whether those high yields reflected a reasonable belief that the companies would have to cut back on their shareholder payouts in order to cover current and future upgrade costs.

Investors also have to be worried about rivals within the wireless space. T-Mobile US (TMUS -0.06%) has captured some competitive advantages in terms of wireless spectrum that could help its long-term quality, and most importantly, it doesn't have legacy landline assets to worry about.

AT&T and Verizon used to be considered extremely safe and reliable stocks that paid solid dividends and wouldn't see much volatility. Unfortunately, both stocks have lost 25% of their value so far in 2023, and the latest news could be yet another crippling blow for those who have been bullish about their recovery prospects.