Canadian telecom stocks have returned about 14 per cent year-to-date, compared with a gain of only about 1 per cent for the S&P/TSX index. BCE Inc., Rogers Communications Inc. and Telus Corp. are all near 52-week highs.
The run-up has some analysts re-evaluating their positions in the sector.
Greg MacDonald, an analyst with National Bank Financial, reduced his rating on BCE shares this week to "sector perform" from "outperform," citing the recent run-up in the price.
Historically, telecom stocks have done well in the early stage of an economic recovery as investors seek relative safety and income (high dividend yields). As the recovery gains speed, money flows to more cyclical sectors that offer the potential for greater capital gains.
Vince Valentini, an analyst with TD Securities Inc., published a report Wednesday ranking the big three Canadian telecoms as holdings for investors who want to keep some exposure to the sector.
His top pick: Telus .
Mr. Valentini created a rating system for the three stocks based on seven criteria. Telus ranked first for EBITDA growth, potential to beat financial expectations, geographic exposure and takeover potential.
Rogers rated first place for free cash flow and dividend growth potential as well as for business mix.
BCE won top spot for valuation. "We decided to give the first place ranking in this category to BCE owing to its discounted P/E multiple combined with its virtual tie for the lowest EV/EBITDA multiple," Mr. Valentini explained.
He has a "buy" rating on Telus and "hold" ratings on BCE and Rogers. His 12-month price targets on the stocks, respectively, are $50, $35 and $43.
Disclosures to note: TD has performed investment banking services for all three of the companies in the last 12 months. Additionally, it owns 1 per cent or more of Telus stock.