Alternative Carriers Finally Coming Around

If there's one thing that 2010 reminded us about stocks, it's that no trend lasts forever. While that can be a bad thing, it doesn't have to be. Take the "alternative carriers" for instance, a group that barely even qualifies as a category of stocks for many investors, and with the exception of Vonage (NYSE:VG) is made up of anything but household names. Worse, the S&P 1500 Alternative Carrier Index is one of the market's biggest 12-month laggards among the 200+ industries I follow, in the red by 6.3% versus where it was a year ago.

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Yet, the last six months have slowly but convincingly pulled the group out of its funk and into a budding uptrend. That's not to say it's on fire yet, because it's not. What it lacks in pizazz so far, however, it makes up for in consistency. And, if the brewing momentum is any clue, the fire could be lit soon and we need to be ready.

Picks of the Litter
The first half of the year wasn't a great one for Neutral Tandem (Nasdaq:TNDM). Not only did earnings shrink sequentially in the first and second fiscal quarters, they also fell short of expectations. Perhaps the market knew what it was doing when it sent TNDM down from $30 in mid-2009 to a low of under $10 in September.

Likewise, maybe the market is giving us a message with the fact that Neutral Tandem has bounced back to well above $14, crossing above the 200-day moving average line in the process. And why not? With a trailing P/E of 12.9 and projected 2011 P/E ratio of 12.1, it's not like it's got much to overcome.

Cogent Communications (Nasdaq:CCOI) is another budding stock, though one probably not getting its fair shake. While the past looks terrible, loaded with losses, the losses have been getting smaller to the point where break-evens and even slim profits are on the 2011 horizon. And like Neutral Tandem, the more than 40% runup since the July bottom may well be a glimpse of growing investor confidence.

Then there's TW Telecom (Nasdaq:TWTC), with a misleading trailing P/E reading of 12 thanks to a massive one-time $227 million benefit last quarter; the company would have earned only about $16 million otherwise. That translates into per-share income of about 9 cents, and underscores the obscured reality that - sequentially - TW Telecom is growing its bottom line. The income of 51 cents per-share expected for 2011 would not only be a record, but puts the projected P/E in the 33 area. (Learn more about the P/E and other ratios in our Investment Valuation Ratios Tutorial.)

And if you didn't put it all together, for all three of those stocks (and the whole industry for that matter), earnings have not only been getting better, but are also expected to keep growing through the coming year.

Birds of a Feather
While many of the group's individual stocks are attractive, this is a case where the group as a whole will likely need to make at least a little more progress from here for any of these stocks to make any meaningful progress beyond some minor near-term gains.

See, the group hasn't really participated in the recovery process to date. It's not necessarily a problem though; it just means there's a whole lot of untapped potential here to unleash, if the group can just push a little higher.

Bottom Line
That's a big "if" though - a key technical resistance line in place since late 2009 has capped all the prior rally efforts. The good news is that it won't take a whole lot to get the group over a big technical hump, as the S&P 1500 Alternative Carrier Index is only a little more than 1% away from blasting past the ceiling. If the industry can just put the technical feather under its cap and pair it up with the improving fundamentals, I'm looking for this group to offer some of 2011's biggest and best surprises.

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