Understanding the Brand New Communications Sector: FANG’s and More
We’re continuing our series on the sectors of the stock market with a look at a category that’s currently in flux. Today’s sector-in-focus has traditionally been known as Telecommunication Services, but that will be changing this November when the new Communication Services sector is officially born. This change is a practical response to the declining market relevance of the telephone service giants that once played a huge role in the economy. The S&P500, for instance, only lists three firms in the Telecom sector; it’s one of the smallest sectors under the current classification scheme. But not for long.
The sector is being re-conceived to focus on communication, service, and content distribution through various electronic media, and will include headline moving stocks like Google, Netflix, and Facebook (they’ll be moving over from the Technology Sector). Also including media and entertainment firms like Disney (most of which it’s absorbing from the consumer discretionary sector), this new sector will make up well over 10% of the S&P 500.
With companies ranging from ATT to Google to Walt Disney, the new sector will feature big names with diverse business models. As always, investors will have to learn the analytical significance of this new classification on the fly. At their core, these stocks will share business models that involve that provisioning of digital services and content; that means competing for subscribers and ad space, which is why analysts think the likes of Google and Facebook will be competing more directly with media companies than tech startups. We’re entering a world where movie producers, social media feeds, and search engines are all competing for the same thing: views.
While it’s not yet clear how consumer spending on digital services will shift with the business cycle, we can safely say that the new sector will have added growth potential and higher risk than the old Telecom grouping. Indeed, by claiming three of the four vaunted FANG stocks from the Information Technology Sector, Communications would feature stocks that have driven much of the historic growth of the market over the past several years. But, drawing heavily on former consumer discretionary stocks and unprecedented growth in digital ad spending, this new sector could be vulnerable in the event of a draw-down.
The final details of this shift have not been finalized, but it will be expected to drive some modest volatility in the market as sector-based ETF’s seek to rebalance to reflect the new scheme. The Communications sector will certainly attract more media attention than the old telecoms, which had largely become defensive, value-oriented plays. But the old telecoms will make up only about 10% of the overall market cap of the new sector.
The continued high-profile, high-dollar competition in the digital media space seems likely to drive a stream of profitable news events in this sector into the foreseeable future, with mergers and acquisitions particularly active. If you’d like to learn more about using news analytics, deep historical data, and proven research to find market-beating profits in every sector, we recommend one of our complimentary virtual training seminars. We don’t put on a hard sell, just a practical demonstration of a platform that’s letting smaller investors access the quant-driven profits that hedge funds have been harvesting for decades. You can claim a spot in our next available session using the button below: