The 5 Worst Telecom Stocks of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.8% gain in 2010. Of course, kindness might still feel relative after a lost decade of negative returns that included the nauseating depths and panic of the financial crisis.

Still, not every stock sees gains when a rising tide lifts all boats. Here's a list of this year's five worst performers in the telecom industry, which ignores companies that have gone bankrupt or sunk below $200 million in market capitalization.

Source: Capital IQ, a division of Standard & Poor's. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $200 million.

Pacing the underperformers list is Level 3 Communications. While the company is advantageously positioned to benefit from a boom in Internet traffic, sales continue to dwindle. That's a problem because Level 3 also carries a sizable debt load with several bonds reaching maturity in the coming years. The company has $1.25 billion in debt maturing in both 2013 and 20 14. If Level 3 can't begin to show better traction in the coming years as services like Netflix's (Nasdaq: NFLX) streaming media push Internet infrastructure needs, there's little chance it'll be able to continue receiving financing for its bloated balance sheet.

Another company swooning last year was Neutral Tandem, which posted a 34.6% loss. The losses started early in the year, and Neutral kept slip-sliding downward through the summer. The culprit? While minutes billed across the company's core tandem switching business showed strong growth, fees charged took a hit. That led to revenues declining more than expected. Declining revenue per minute billed is the result of the company's decision to slash prices to maintain market share. That's a precarious position to be in, but the company's position appears to be stabilizing.

So what's on tap for the telecom industry in 2011? The continuing need to alleviate data bottlenecks will be one persistent theme. In wireless, that means outsized spending on upgrading to next-generation LTE data networks. The developing world should continue to see strong growth in 3G as well.

Opportunity presents itself to companies offering connections below ground as well, but increasing traffic doesn't assure success. While Level 3 is known for its fiber assets, the company's content delivery network business recently made headlines when it outbid Akamai to win a large chunk of Netflix's business. While the news initially caused Level 3's stock price to soar, the contract win also highlighted the tenuous agreements between different network operators when Comcast (Nasdaq: CMCSA) demanded payments from Level 3 for the additional traffic it would handle. Given the complexity of peering arrangements and fierce price competition to handle traffic, disputes of this nature should be more common in the coming years.

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