Verizon (Part 2) – The Stock Price Picture Looks Good

Friday, December 3, 2010

In “Verizon (Part 1) – Announcements Support Its Growth Status” (December 2), I discussed the company developments that support Verizon Communications (VZ) being viewed as a growth stock. In today’s write-up, I examine the stock’s current picture and what we could expect if investors reclassify Verizon from an income to a growth investment.

Verizon’s previous shift – from growth to income

The following graph presents Verizon’s major moves over the past five years.

Period #1 – Growth rise from 2006 to 2007

Verizon rose steadily from $30 to $45 per share. The rise was faster than dividend increases, thereby producing a declining yield, down to about 3.5%, well below the almost 6% AAA corporate bond yield.

Period #2 – Bear market collapse in 2008

We know this period well when major economic and financial reversals upended virtually all stocks. Verizon fell in two waves: (a) from $45 to $35, then (b) from $35 to $25. At $25, the Verizon became an income investment, with the dividend yield reaching over 7%, ahead of the AAA corporate bond yield.

Period #3 – Base building from 2009 to 2010

With the dividend yield providing support, Verizon missed some of the February/March 2009 sell-off. Since then, its stock price has seesawed between about $27 and $33. Investors searching for yield alternatives in the low interest rate environment have been drawn by Verizon’s 6% yield level, especially as AAA corporate bond yields declined to a low of 4.5%.

The investor base now is strong

It’s well known that stocks in “strong” hands can produce longer-lasting results than ones in “weak” hands. Verizon’s current holders can be viewed as stronger. The yield investors have enjoyed a good income stream. And the stock, although drifting up and down, has mostly avoided scary moments. Moreover, the company’s fundamentals and outlook have been improving, making the stock safer. So, barring some significant adverse event, Verizon’s shareholders will likely not be frightened out of their positions.

The missing investor group (growth) could provide the impetus for a nice run-up

And this is where Verizon becomes an interesting investment. The stock’s 2008 fall and its extended stay in the high-income category has had growth investors looking elsewhere. With the latest news, though, comes a future growth potential. With a strong shareholder base already in place, growth stock investor buying should be additive, meaning the stock could show nice gains.

And where there is a rising stock…

… there are interested investors. Looking at that base building in terms of stock price, we see the typical “box” formations, with the stock price rising and falling generally inside upper and lower boundaries.

The moves that really generate interest are the breakouts – either up or down. Many investors stay on the lookout for them because (a) the move can indicate something special is happening and (b) once outside the boundaries, the unleashed stock price can rise or fall quite dramatically.

Hence, the orange circle showing that, during this time of positive company developments, Verizon’s stock price is trading at the top end of the range. If growth investors are beginning to get aboard, we could see a breakout above the $33, even $35, level. That could be the spark that begins Verizon’s move from income to growth classification.

So… Verizon’s stock price is acting appropriately given past conditions. The opportunity is that not only does the company have good fundamental growth prospects, but also growth investors returning could give the stock a double boost.

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