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Why A Supposed Telecom Company Should Be In Your Energy Portfolio

I am, as regular readers may have gathered, somewhat of a contrarian by nature. I put that down to nearly twenty years in currency dealing rooms around the world, where such an attitude serves well. My wife might believe that it is just that I am an awkward so and so, but that is my story and I’m sticking to it. Anyway, as a contrarian, a stock that has lost around 40 percent in three months is always of interest to me; hence my initial interest in Mas Tec Inc. (MTZ).

Mastec Inc
 
The first thing that might strike you about the chart above is that VectorVest, whose chart it is, places Mas Tec in the Telecom equipment sector. Talking about it here, in an energy focused newsletter may therefore seem a little strange, but all will become clear if you bear with me.

The first thing to point out is that when a six month chart looks like the one above, while it may pique my interest, it should also be approached with caution. The “dead cat bounce” is familiar to most traders, and is based on the fact that even a lifeless object, if it has fallen far enough, will at some point bounce. For a few reasons, though, MTZ doesn’t strike me as an example of that phenomenon, but rather as just great value now that a bottom would appear to have been found.

The first of those reasons explains why a stock listed as a telecom company is appearing here. Mas Tec isn’t just in that business. They are, in fact, a construction company that specializes in infrastructure projects. Historically, telecom has been their focus, but they also have other divisions, most notably one that concentrates on the infrastructure needed by the oil and gas industry, and that is where I believe there is an opportunity.

After the big drop prompted me to look at the company, one thing caught my attention in their earnings report and subsequent analysts’ call from August 11th. Revenues and earnings were roughly in line with expectations this quarter and relief that things weren’t worse may explain the small rally since, but something more significant was buried in that report. Mas Tec had expanded their Senior Credit Facility to $1 Billion and added the capacity to borrow in Mexican Pesos. Those that follow the energy market may have an inkling as to why that could be significant.

I wrote last week about the Mexican government’s decision to allow foreign companies access to the country’s oil and gas reserves for the first time in four decades in the hope of sparking a U.S. style boom from shale deposits. I highlighted a couple of opportunities then, but reading between the lines it seems that this could be another. Further digging around revealed that Mas Tec has already begun to prepare for this boom. They are already building pipelines that connect to the U.S./Mexican border and are presumably confident of winning contracts as the necessary infrastructure build out occurs in that country.

It may not even take any huge contract awards for the stock to benefit in the coming months. Just the rumors of possible business could well be driver enough in the short term, and even without that, MTZ looks cheap at a forward P/E of 13.56. Their core telecom business is cyclical by nature, and it is weakness there that has caused the dramatic fall in price since early April. As the large U.S. companies start to compete on network quality following a period of aggressive pricing competition, however, more capex spending and therefore further business for Mas Tec in that field is likely.

While that provides a backstop, it is the opportunities in pipeline construction, particularly in the emerging Mexican market that I believe will give a big upside to this currently out of favor stock. While a stop loss to guard against a clean break below the previous low of $26.38, say at around $25.50 would limit potential losses to around 13 percent, a return to the pre-drop level close to $45 offers the prospect of a juicy 50 percent upside. Now that’s the kind of risk/reward ratio that even an awkward so and so like me can appreciate!




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