Some analysts are on record calling Telstra Corporation Ltd (ASX: TLS) shares a "dog".
But can this kitty purr again?
TLS share price
As can be seen above, Telstra Corp shares have drastically underperformed the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), over the past year.
Bear case
Telstra shares have slumped for a few reasons. Most of them are perceived threats to its status as the number-one telecommunications business in Australia.
The first is the NBN, or National Broadband Network. It is taking away Telstra's ability to charge other telcos for access to its copper network. That means Telstra's profit margins in fixed services like voice and broadband will fall.
Next up, Foxtel is…well… being Netflixed.
In mobiles, Telstra's leading business, TPG Telecom Ltd (ASX: TPM), Optus and Vodafone are pushing harder than ever for a bigger slice of the pie. TPG, for example, is rolling out a high-speed mobile network in densely populated areas only, presumably for a cheap price.
While these threats are starting to play out, Telstra is forecasting a $3 billion reduction in its operating profits over coming years.
Bull case
Investors often underestimate how much easier it is to buy a good business than build one from scratch. But here's a brief bull case for Telstra shares…
Telstra is being paid by the Government to give up its 100-year-old copper cable network, which was only becoming less valuable if you ask me.
Foxtel is a smallish part of its business, so it won't be a game-changer if Netflix wins that fight.
And currently, most people know Telstra is the most expensive mobile phone provider — but they still pay up for the right to access its network. In other words, bulls might say Optus and Vodafone will be hurt more by TPG's push into mobiles.
Finally, Telstra, using current analyst estimates, is tipped to pay a 6.1% fully franked dividend.
Foolish Takeaway
Something I find fascinating about finance and human psychology, in general, is the concept known as endowment bias. Basically, it says that if you own something (like Telstra shares) you are more likely to view its characteristics favourably than someone who does not own it. You have seen it before: those parents who constantly post photos of their children on Facebook. They think their child is the only child that is special. Even if they are butt-ugly, their child is beautiful. Right?
It's the same with shares. You will rarely/never find a professional fund manager saying "We own it, but I wouldn't buy it."
That's why it is important to weigh up the pros and cons for yourself. If you think Telstra's mobiles business is here to stay, with Foxtel and broadband producing decent cash flow — Telstra shares might be a good buy at these levels.
