Thursday, February 03, 2005


I jumped on AT&T pretty hard a few weeks back. I was looking for a stock that would hold up if the market corrected. This is a trade that my Dad, Papa John, and many of his buddies would make during the '60's. It often worked like a charm. The market would get ahead of itself, Papa John would buy T and it would go up while the market went down.

When the news first hit that SBC was in talks to buy T, I doubled my position. Why not get a little extra juice out of Ma Bell. The trouble is I bought T and got an SBC T shirt for my trouble.

I am actually up 9.7% in a lousy market which is really good but the news of the take out gave me hopes for a quick 20% pop. As it is, I will get .78 shares of SBC and $1.30 cash for each share of T. The other great news is that it will take about a year to get the deal cleared by the regulators.

On the last couple of take-overs I was fortunate enough to be able to hold for long-term gains. The difference is that the gains were substantial. In this instance the gain looks to be in the 10 to 15% range plus the total dividend of almost 11%. The regular dividend is 5% and the $1.30 at the end will be a special dividend.

I waffle. I am confident that SBC will recover to the $26.50 range near term. The way the two stocks are trading, the price of T will go to $21.50 when SBC hits $26.50. If I bail my return will be 19% in just a few months. If I hold and SBC does well, I could do much better and get better tax rates.

The real problem is the outlook for SBC. Ironically the SBC land line business is falling just as fast as the T land line business. SBC is growing the wireless business (SBC owns 60% of Cingular Wireless--BLS owns 40%) and it is spending big money to build out high speed internet services.

No one knows how quickly the public will adopt low cost internet phone service. This is a very important question for SBC to consider. It has taken Vonage a several years to offer service in almost all markets. Google has not announced VOIP service but there are numerous clues that Google will come into the business like a New England Patriots Linebacker.

There are millions of Google account holders. The incentives to adopt the Google service could be compelling for many of these account holders.

Yes, I have Google eyes. Google may never offer phone service. How fast will TWX or Comcast build out their customer service? How many folks will sign up for free service through SKYPE? The point is that SBC has a lot of competition that is going to take share away from high cost local service.

I will probably bail if the stocks trade up a bit. I may bail sooner if something I like gets cheap enough.

In some accounts, I own one or more of three airlines, DAL, CAL or NWAC. The public does not own these stocks. Institutional investors are the only shareholders left. For example, DAL is 95% owned by institutions and 15% of the shares have been sold short. In effect, there are 110 shares of stock outstanding for each 100 that have been issued by the company.

If the airline market were to turn, the shares sold short would be in very high demand. The company may go bankrupt. I am spreading my dollars around. I may sell T and put part of the money into AMR. All of these airlines are leveraged to the hilt. If business turns good, the survivors will do extremely well.

Analyst write that the discount carriers are taking all the business. If the market turns, there will be plenty of business for all. Please remember, I do not recommend stocks! I own and write as a hobby. If you read one of my rants, buy AT&T and only get an SBC T shirt, don't blame me. If you want a free portfolio review, let me know.


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