The markets may still be nervous, and there could be another leg down, but one area that is showing strong growth and demand is telecom services. In a new research note, Cowen’s highly regarded analyst Colby Synesael and his team make some changes to the top three high conviction stocks to buy.

With demand for storage, streaming, latency, bandwidth and more skyrocketing, the top companies in the sector continue to shine. Cowen’s top three stocks to buy remain solid additions to an aggressive growth portfolio, and all are rated Outperform.

Level 3 Communications

This company remains in the number one position of the top three high conviction picks. Level 3 Communications Inc. (NASDAQ: LVLT) provides local, national and global communications services to enterprise, government and carrier customers. Level 3’s comprehensive portfolio of secure, managed solutions includes fiber and infrastructure solutions, IP-based voice and data communications, wide-area Ethernet services, video and content distribution, and data center and cloud-based solutions. Level 3 serves customers in more than 500 markets in over 60 countries over a global services platform anchored by owned fiber networks on three continents and connected by extensive undersea facilities.

While the company reported second-quarter numbers that were disappointing, the Cowen team feels that growth should start to accelerate in the third quarter, and even more so in the fourth quarter. They reset numbers in line with management guidance but continue to believe that the current entry point for the stock is very compelling, and the long-term thesis for the company remains unchanged.

The Cowen price target for the stock is $62, and the Thomson/First Call consensus price target is at $60.36. Shares closed Wednesday at $45.44.

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Zayo Group

This company had a well-received initial public offering last fall. Zayo Group Holdings Inc. (NYSE: ZAYO) provides comprehensive bandwidth infrastructure services in over 300 markets throughout the United States and Europe. Zayo delivers a suite of dark fiber, mobile infrastructure and cloud and connectivity services to wireline and wireless customers, data centers, Internet content providers, high-bandwidth enterprises and government agencies across its robust 82,000 route-mile network. The company also offers 45 carrier-neutral data center facilities across the United States and France. Zayo was the first to offer bandwidth shopping and buying in under two minutes through Tranzact.

Several Wall Street firms loves the strong defensive business model and cite the company’s solid growth trajectory, the highly recurring revenue model, high incremental EBITDA margins, management’s experience and ability to drive high returns on invested capital. Like others in the sector, Zayo’s favorable multiyear secular tailwinds, as well as the increased probability of a real estate investment trust structure over the long term, make it a solid buy for investors now. The Cowen team notes that the company will report earnings on September 18, and they expect revenue and EBITDA to come in above estimates.

The Cowen price target is $33, above the consensus target of $30.80. The stock closed on Wednesday at $28.36.

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Digital Realty Trust

This stock may be a solid play for more conservative accounts. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia. Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services to manufacturing, energy, gaming, life sciences and consumer products. The company rates high with portfolio managers as a large part of the market cap of the company is in institutional hands.

The company reported strong second-quarter numbers that were ahead of expectations. It also bought Telx, a national provider of data center colocation, interconnection and cloud enablement solutions back in July in a $1.89 billion deal, and the acquisition should close this month. The combination is expected to double Digital Realty’s footprint in the rapidly growing colocation business, as well as provide Digital Realty customers access to a leading interconnection platform. The Cowen team sees the deal as underappreciated and a very strong addition.

Digital Realty investors are paid an outstanding 5.47% distribution. The Cowen price target is $73, and the consensus target is $70.93. The shares closed Wednesday at $61.69.

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Telecom services demand continues to grow at breakneck speeds. Adding any of these stocks to portfolios with no allocation or small allocations to the sector makes good sense. Scale buying shares is a good idea with the market still very volatile.

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