As you know, this letter is a long-time promoter of telecommunications opportunities, mostly in the form of the FCC lotteries that have been held over the last decade. These lotteries (including, one hopes, the recent MAS series, for which many of you applied) have certainly been the greatest rich man's giveaway program in the history of the country, with typical returns of over 20-1 on the risked dollar. There will hopefully, although it's still uncertain, be at least one two more rounds of lotteries for "fill-in" cellular markets and interactive cable television; I'll keep you informed. But that game will soon come to and end, and the question arises of how one can keep a long-term participation in this area.

There's no doubt that the explosion in computer/telecommuni-cations/electronics technology that we've seen over the last decade will not only continue, but accelerate. This area of technology will literally shape the future, and you want as much participation as you can get, whether it's through direct ownership of spectrum width yourself, or the shares of companies that do. This is, you'll recall, an underlying rationale for my recommendation of several small telephone companies in the October l99l issue. I continue to feel they're the highest potential, lowest risk industrials you can own.

In the past, I've stayed away from the better known phone companies, or Baby Bells (i.e., Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West) for three major reasons:

1. These outfits are so big, and so widely owned, that they're really just a proxy for the market itself. And since the market is grossly overpriced, even while the economy is again cyclically poised on the edge of the abyss, it is tough to rationalize buying them.
2. The phone business is highly regulated, with the boards that set rates of return largely populated by anti-business "consumer advocate".
3. Ma Bell and her babies have lived their whole lives as almost parastatal corporations. The management was nearly as stodgy, bureaucratic, and inefficient as the government itself.

   There have been some changes, though. Let me spell out my rationale for holding some of the Baby Bells, at least as part of a hedging program. In brief, I believe they will grow much faster than the market, while the regulatory climate evolves for the better, and management gets hip.

   On the regulation front, the Babies have been precluded (on a Federal level) from three areas: manufacturing, information services, and long distance. Of course, like practically all regulation, these restrictions hurt everyone everyone except potential competitors, who are enabled to sell lower quality goods at higher prices. But the restriction on manufacturing has become academic, in that it's tough to compete with the Pacific Rim countries anyway. And the ban has just been lifted on information services. As the world becomes ever smaller, with international calls eventually becoming as common as local ones, regulation will just become an irrelevant nuisance to electronic businesses.

Why earnings will grow

In the past, phone companies made most of their money by adding new lines, which was a function of a growing population, and of a higher percentage of the population having a phone. But population is now stable, and with everyone already having a phone, some might ask where further growth will come from. Four areas: multiple lines, software-based services, cellular, and overseas expansion.

Huge current growth is coming from multiple lines, which could double the number of phones in short order; already there is a shortage of available numbers and area codes using the current system. Part of the expansion is due to the fax. And as fax prices continue dropping, everyone will soon have one, much as everyone has a TV and a microwave. And those faxes will be used more often, both as result of their ubiquity, and the fact it's already cheaper (as well as far faster and more certain) to send someone a fax than a letter.

Added to that is the growing trend toward home offices. Soon many homes will have multiple lines out of necessity; at least two for voice, plus another for fax, plus another for computer. Each line is additional revenue for the telco. And cellular remains not only the most profitable, but the fastest growing area of the business on top of it all. Better yet, the amount of revenue per line should rise, even as the cost of basic services drops, because of optional services that the telcos can now sell - like call waiting, call forwarding, and voice messaging. Especially as copper wire is replaced by fiber optics, adding services becomes mainly a matter of creating additional software. The value to the consumer, and the price he can be charged, bears little relation to the cost of providing the service. In fact, while revenues are increasing, the telcos' costs should actually be dropping. They're all filled with an immense amount of deadwood accumulated through-out their decades of cost-plus regulation; lots of paper-shufflers and featherbedding union employee are going to be forced to out and get a life for themselves as they 'are replaced by computers. The number of employees per l992 lines has fallen from 52 in 10,000 to about 43 in l991, and estimates are it'll be around 35 by l995.

With the deregulation of the last decade, U.S. telcos are regaining the technological ascendancy they once had over everyone else. As a result, they are not active players in buying interests in and modernizing the systems of numerous Third World countries, which are being privatized. And the growth there should be explosive. Most of the world still have only a tiny fraction of the per capita telephone count of the U.S., and the phone they have hardly work.

Whole systems will be junked, and the Baby Bells are positioned to be major players in replacing them. Meanwhile, cellular revenues are growing by over 35% per year.

Which ones?

It's tough to choose among the seven Babies, if only because it's always possible for their regulatory environments to change, or their managements to adopt different philosophies. If only because an incoming tide raises all ships, all of them should do considerably better than the market as a whole, but I suspect that Southwestern Bell will lead the pack for at least two reasons: it's heavily committed to cellular, and it's committed to expanding abroad. Among other things, it owns l0% of Telephonos de Mexico. My second choice would be PacTel, for much the same reason - it's aggressive abroad, and in cellular. The table below gives you some basic data on their stocks.

Name	Symbol	Price	P/E	Yield
Ameritech	AIT	60.75	14	5.8%
Bell Atlatic	BEL	44.37	13	5.7%
BellSouth	BLS	47.00	15	5.9%
NYNEX	NYN	72.87	13	6.3%
PacTel	PAC	41.00	15	5.2%
Sowest Bell	SBS	57.87	15	4.9%
US West	USW	34.37	12	6.l%

The Baby Bells haven't really joined the market hysteria of the last few months, for what reason I don't know. Maybe it's because they actually have earnings, or perhaps because they don't have the syllables "bio" or "gen" in their names. You'll notice that their yields are almost twice the 2.8% of the DJIA. All the Baby Bells have high dividends, especially NYNEX at over 6%. But it would be foolish to choose between them, or choose them over other stocks, based on a couple of percentage points. I'm recommending them (and will add them to the Quarterly Open Positions list) as growth situations., because the earnings, and dividends of these stocks are likely to grow 5% to l0% per year. Nonetheless, the relatively high yields provide some protection in case the market fall off a cliff - which is quite likely. As a consequence, you should hedge these long positions with short positions of an equal dollar amount from issues appearing on the quarterly short sale list. Very likely you'll show profits on both sides, regardless of what the market does.

These stocks are extremely non-volatile so, unfortunately, option premiums are too trivial to bother with. A pity, since the best way to buy a stock you want to own is by selling puts against it, and collecting the premium, while waiting for its price to come to you. If you've been doing that against stocks like those in the Freeport group, as I've suggested, you know how gratifying that strategy can be. With these two, just buy them on weakness (again, simultaneously going short on overpriced issues as a hedge), and profit while the worldwide telecommunications revolution advances.