Watch Communication Services for a turnaround - BMO's Belski
Tamer Soliman/iStock via Getty Images

There are signs that the severe downtrend in the Communication Services (NYSEARCA:XLC) sector could be close to a bottom, according to BMO Capital Markets.
Strategist Brian Belski, who upgraded XLC to overweight in mid-May, notes that the sector has trailed the S&P 500 (SP500) (SPY) by 24% since late September.
"On a trailing one-year basis, Communication Services has lagged the broader market by 22%, the lowest reading recorded in our data history (data before COMS became a sector uses constituents as of Sep â18)," Belski wrote in a note Wednesday. "Our work shows that extreme levels like these tend to reverse quite quickly, and is a main reason for our optimism on the group going forward."
"The prior drop in relative y/y price change below the -2std threshold came in 2015 when Communication Services underperformed by 10% in January, and then jumped to double-digit outperformance nine months later," Belski said.
In addition, more than 80% of the stocks that make up XLC "were trading more than 20% off their 52-week closing price highs during most of last week, until solid gains on Thursday and Friday, helped reduce that number to 67% (still second-highest across sectors)," he added.
"During the almost four-year history as a sector, peaks in this metric occurred at similar levels - 85% in March â20 and 77% in Dec â18 - and these coincided with price bottoms for Communication Services."
The sector is very top-heavy, with the eight largest stocks making up about 86% of XLC. And those stocks have de-rated based on the inflation and rate environment, Belski argued.
Looking at those stocks and their next 12 months P/E ratio:

Alphabet Class A (GOOGL), current NTM P/E 18.6, current vs. March 23, 2020 COVID low -0.5x
Alphabet Class B (GOOG), 18.7, -0.4x
Meta Platforms (FB), 15.2, -0.4x
Disney (DIS), 21.3, 4.9x
Verizon (VZ), 9.4, -0.7x
Comcast (CMCSA), 11.6, 0.9x
AT&T (T), 8.3, 1x
Netflix (NFLX), 17.2, -37.8x

"Communication Services is the quintessential investment barbell of value and growth, in our view. In this market environment, we believe investors should be maintaining positions in secular growth names, while overweighting value areas and dividend payers," Belski said.
Telecom and media are the value end of the barbell, while entertainment, like Netflix (NFLX) and Disney (DIS), are the growth side.
Morgan Stanley argued recently that XLC is still vulnerable to payback in demand.