When the long-awaited Battle of Winterfell in “The Long Night” episode of “Game of Thrones” (GoT) got rolling on HBO a few weeks ago, social media lit up with complaints about blurry and dark imagery.
GoT cinematographer Fabian Wagner blamed it on HBO’s signal compression. But you can hardly fault HBO. The internet infrastructure is strained and creaky, and GoT is wildly popular. Over 17 million viewers watched that episode.
So HBO had to do something.
GoT isn’t the only data pig clogging up the internet. Thanks to shows including “Stranger Things,” Netflix NFLX, -1.35% accounts for 15%-40% of traffic depending on the time and location, according to Sandvine’s Global Internet Phenomena Report. Alphabet’s GOOG, -1.41% GOOGL, -1.33% YouTube, Amazon AMZN, -2.02% Prime Video and embedded website videos each sop up around 10% or more of bandwidth.
When GoT fans flooded Twitter TWTR, -2.09% with complaints, alert investors saw an opportunity. The GoT battle-scene problem reminded them of how much we need a faster build out of the internet and 5G, or fifth-generation wireless technology.
Obvious tech plays here include Qualcomm QCOM, -1.58% Cisco CSCO, +0.75% Xilinx XLNX, -1.29% Intel INTC, -1.41% Nokia NOK, -0.40% and Ericsson ERIC, +0.43%
Read: Up to 10.7 million Americans could miss work the Monday after the ‘Game of Thrones’ finale
But my favorite GoT play is one you’ve probably never heard of: Crown Castle CCI, -0.22% Behind the scenes, the Houston-based company provides much of the fiber and cell-tower infrastructure in the U.S. It’s a way to play a big tech trend without the nauseating tech-sector volatility. And you can collect a 3.5% yield to boot. That’s something you rarely see with a hot tech stock.
Here are five reasons why Crown Castle is the best GoT stock to own.
1. Insider buying
Insider buying is a key factor I look for in reviewing names to suggest in my stock newsletter, Brush Up on Stocks. At Crown Castle, the signal is strong.
Director Martin Landis just bought over $2.2 million worth of stock at a little over $123 a share, not too far below where it trades now. Last November, two other directors bought about $700,000 worth at $106 per share, and Landis put another $1 million into the stock last August at $110 per share.
Landis has a good track record. In my way of analyzing insider activity, continued buying on strength is a bullish signal. So is the “cluster buy” formation of three or more insiders buying shares. All of this adds up to a great insider signal at Crown Castle, one reason I just reiterated this company in my stock letter.
2. Solid growth
Crown Castle offers fiber to customers with high bandwidth needs like media companies and Wall Street firms. It also runs big cell towers and “small cells” throughout the U.S. The latter category, small cells, is where the growth is.
These are the boxes you see all around on utility poles, lamp posts and the tops of buildings. Even though they only cover a few hundred yards at most, small cells are a key piece of the infrastructure build out. That’s because they off-load data traffic from towers to boost tower capacity when data demands overwhelm networks — like when GoT airs.
“Think about the towers as overhead lighting inside of the building and small cells as lamps, where you’re focusing light in a particular area,” Crown Castle CEO Jay Brown explained in the company’s first-quarter earnings call. Small cells off-load traffic from towers to keep the gear on towers running at its best.
“As we move toward 5G, there’s going to need to be a significant number of small cells deployed to meet the demand,” says Brown. He expects to nearly double the number of small cells deployed in 2019 compared with 2018, already a record year.
About 70% of Crown Castle equipment is in the hundred largest U.S. markets. This positions Crown Castle to benefit from the constant upgrade in network infrastructure.
All of this adds up to year-over-year site rental revenue growth of around 6%, and cash flow growth of 8%-9%, depending on how you measure it. That’s not crazy tech growth, but it has brought market-beating returns for investors. Including dividends, CCI is up 90% since I first suggested it in my stock letter on Jan. 4, 2015, compared with 55% for the S&P 500 exchange traded fund SPDR S&P 500 SPY, -0.65% (Both returns include dividends.)
Brown puts current annual data demand growth at 30%-40%. He thinks that growth will increase as 5G rolls out and more devices like appliances and cars are connected, in the internet of things.
“We believe the network infrastructure needed to support 5G will dramatically increase the demand for our tower and fiber assets over time,” says Brown. “The underlying demand is not going away.”
3. Less volatility
Crown Castle leases its data infrastructure to the big four companies in cell service, or AT&T T, +0.57% T-Mobile TMUS, -0.01% Verizon VZ, +1.24% and Sprint S, +1.64% They represent about three-fourths of site rental revenue, which accounts for nearly 90% of Crown Castle’s revenue.
The key here for investors is that these customers are locked into long-term contracts of around five to 15 years, and renewal rates are high. Recurring revenue from long-term contracts creates fairly stable and predictable sales and earnings growth.
That dampens volatility in Crown Castle shares, and makes the company a fairly safe and stable way to play a big trend without all of the sickening volatility that can hit you in tech stocks.
Another plus for investors: Crown Castle is the big player in this space. It operates about half the small cells out there, while carriers operate the other half. This makes Crown Castle a good play on the internet build-out trend.
4. Returns on capital
All this infrastructure is costly. Crown Castle says it has spent about $13 billion to develop its footprint in the top U.S. markets with the greatest long-term demand. The company will spend another $2 billion this year.
The good news for investors is that these investments yield around 8%, a return that will rise as Crown Castle adds customers. But Crown Castle borrows the money for far less. Crown Castle has been taking advantage of the low rate environment to sell notes at rates of around half the return it gets from investing the money. The company issued $1 billion of unsecured notes with 10- and 30-year maturities in February.
“While those returns are great and justify the investment, I get even more excited when I consider how early we are in the digital transformation of the U.S. economy and in the critical role our infrastructure will play,” says Brown.
5. Defensive characteristics
Ironically, since it is a play on one of the hottest tech trends around, CCI is actually a boring real estate investment trust (REIT). REITs are a snooze fest that growth investors typically avoid, because REITs normally invest in office buildings or shopping malls.
The upside for investors is that REITs have to pay out at least 90% of their taxable income to shareholders. That, plus predictable cash flow growth, explains the 3.5% dividend yield you get when you own Crown Castle shares. The dividend, combined with the recurring revenue from long-term contracts, makes Crown Castle a good defensive play.
If indeed “winter is coming” for stock investors — in the form of a recession-induced bear market — you’ll be glad you own some Crown Castle.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested QCOM, INTC, CCI and T in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
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