Thank Short Sellers for the Rally in Newspaper Stocks?

By: Mark Fitzgerald What accounts for the remarkable run-up in the share prices of newspaper companies over these past two weeks?

Stocks that had been thoroughly beaten to a pulp, losing as much as 97% of their value over the past year, are now rebounding with double-digit gains nearly every trading session. Most interestingly, it's the companies most punished by the market -- such as Lee Enterprises, The McClatchy Co. and Media General -- that have gained the most in this newspaper-sector rally.

The narrative favored by most business journalists is that newspaper companies reporting their second-quarter results beat the low expectations of Wall Street analysts, and showed that their deep cost-cutting could overcome the continuing dizzying drop-off in advertising revenue -- down about 30% from the 2008 second quarter for every publisher that's reported so far. Optimism about newspapers was further stoked as CEOs told analysts that the advertising decline seemed to slow through the quarter.

There's no doubt that that explanation accounts for much of the rally, but not all of it.

Short sellers, those investors who profit when a stock price declines, could be called the unsung heroes of this rally.

Short sellers borrow shares and sell them, hoping the share price goes down so that when they buy shares to return them they can pocket the difference. But if the share price increases, ""shorts"" must quickly buy shares before they take big losses. Their efforts can run prices up rapidly.

It's called ""short-covering,"" and it's the first explanation that occurred to Morningstar equity analyst Tom Corbett when newspaper stocks started soaring on July 15. That's the day Gannett reported a second-quarter profit that surprised analysts expecting a loss.

""I would attribute a good portion of the recent rally to what they call a 'short squeeze,'"" he said Wednesday.

It's pretty clear that short sellers have dumped a fair amount of newspaper stocks -- but there is also evidence that much of the market thinks newspaper stocks are going to fall right back down.

On May 15, exactly two months before the start of the rally, as it happened, my colleague Jennifer Saba and I ran a list of the so-called ""short interest"" in newspaper stocks' for E&P's business-oriented blog ""Fitz & Jen Give You The Business."" What we found was that even though newspaper share prices were at rock bottom, they were being ""shorted"" at very high levels.

Short interest is the percentage of shares in trade that are held by short sellers. As a rule of thumb, when short interest exceeds 5% of average daily volume of shares, it's an indication of bearish sentiment in the market.

Back in May, the short interest in many newspaper companies was way above 5%. Fully 27.23% of McClatchy shares, for instance, were shorted. At Gannett, the short interest was 26.6%. At Media General, 24.8%.

Wednesday, I went back to data, obtained on the useful Web site shortsqueeze.com, to see what short interest is now.

The bottom line: Short interest in newspaper stocks has fallen dramatically, an indication of short sellers covering their positions. Short interest in McClatchy, for instance, plummeted to 8.06% from 27.23%.

Here's a list of companies traded on the New York Stock Exchange with the short interest of Wednesday listed first followed by the percentage for May 15.

A.H. Belo0.74% 2.55%
Gannett 16.96%26.6%
Journal Communications 2.59%3.29%
Lee Enterprises 13.2% 21.13%
McClatchy8.06%27.23%
Media General 18.51% 24.8%
E.W. Scripps 6.3%10.29%
New York Times Co. 13.4% 18.07%
Washington Post Co. 3.18% 3.43%

Despite helping to fire the newspaper rally, however, many short sellers are hanging in there, apparently convinced this is just a sucker's rally.

Mornngstar's Corbett has been a skeptic on newspaper stocks, and even assigns a ""fair value estimate"" of share price of zero to the stock of McClatchy and Lee. He says he's seen nothing recently to change his mind.

""Even with that decline in short interest, when you consider that a double-digit percentage of the float is still short, that tells me there's a lot of skepticism out there,"" Corbett said. ""The market is rewarding newspapers for cutting costs, but that is simply not a viable path to prosperity. Newspaper fundamentals have not changed substantially in the last two weeks.""

Still, the run-up continues for some stocks. Minutes before the close of markets Wednesday, for instance, McClatchy was up 42.4% for the day. McClatchy's share price, which had been mired below $1 for months, was at $2.25. It hadn't been so high since last Dec. 10.