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Telecom hitting new lows

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Telecom stocks are seeing some notable names trade new 52-week lows as the sector continue to see selling. Shares of AT&T (NYSE:T) broke to a 52-week low earlier this morning at $14.59 and bears are eyeballing the 2000 lows near $12. Other notables in the telecom group taking it on the chin are shares of Nextel (NASDAQ:NXTL) $3.80 -21.8%, Cox Communications (NYSE:COX) $32.11 -2.64% and Comcast (NASDAQ:CMSCK) $29.85 -4.35%.

On Friday in the market monitor at OptionInvestor.com, we thought the recent convertible offering on shares of Adelphia Communications (NASDAQ:ADLAC) and technicals there would have the stock under some selling pressure as those institutions that may have bought the convertible offering looked to hedge that position by shorting the common stock. With a "negative tone" to the telecom sector, it's difficult to see a bottom in the stock if we were to see it break to a new 52-week low.

Adelphia Communications Chart - $1 and $0.50 box

Take the weakness in the telecom group and add a convertible offering that is now underwater for those that bought it and you've got a potentially bearish scenario for the underlying stock. What can happen is that the institutions that bought the convertible with a relatively lower YIELD now find their base investment losing value. To "hedge" that underlying investment, the institution may come in and begin shorting the common stock, after all, they have the option of eventually converting into the common stock, thus their risk is not in shorting, but NOT shorting.

Some fundamental investors may be looking at ADLAC's earnings and seeing a stock that doesn't look overvalued. But imagine the stock trading $10 and then the conversion takes place. That conversion would then dilute earnings as there would be more shares on the market and the earnings would have to be spread across all outstanding shares.

With the telecom sector looking suspect and the technicals for ADLAC also bearish with a vertical count currently hinting at $5, we remain bearish on this stock.

In the "Bailey's Basics" section of the website, you will find an article at the very bottom titled "The Analog Devices Convertible" that was written on September 26, 2000. At that time, ADI was trading close to $83 when it completed a convertible offering of $1 billion with a YIELD of 4.75%. At that time we thought that stock might be subject to shorting as the 4.75% YIELD was relatively small. With the stock trading $40 today, one has to wonder if the institutions that took that offering are underwater from $80, or highly profitable on a short position in the stock? I'm thinking the latter.

Jeff Bailey
Senior Market Technician
Option Investor

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