Time to Buy Newspaper Stocks?

By: Mark Fitzgerald Stock prices of newspaper companies are so low ? depending on the chain, they've lost between 55% and 99% of their value in the past year ? that it's tempting to think the time to buy has finally arrived.

Indeed, Mario Gabelli, a longtime investor in the newspaper sector through his Gamco and related funds, raised eyebrows in recent weeks by increasing his stakes in three stocks: Journal Communications Inc., E.W. Scripps Co. and Media General Inc. But a media analyst affiliated with Gabelli's investment company notes a critical common characteristic of the three publishers: They have substantial holdings in broadcast.

"If you look at Journal Communications, for instance, it's more of a television broadcaster than a newspaper publisher," says Barry L. Lucas, senior vice president for research for Gabelli & Co. Journal Communications publishes just one daily, the Milwaukee Journal Sentinel, and roughly two-thirds of its cash flow comes from broadcast, he adds.

Lucas rates Journal Communications stock, which in late January had fallen 71.75% from its highest price in 2008, as a buy in part because he believes broadcasters have more opportunities to develop revenue from mobile technology. "It puts it in a better light than ink-on- paper, where you just don't have the same opportunities," says Lucas, who does not own any stock in the company and is not among those who determine where Gabelli & Co. funds are invested.

But it's difficult to be bullish on companies that are more concentrated in newspaper publishing. Says Lucas, "Between the decline in advertising and the expense pressures, at least in 2008, of energy and newsprint, newspapers faced an absolutely deadly combination." Newspaper debt, most of it amassed to buy more newspapers, also makes the stock unattractive, he argues, especially with expensive refinancing deals ahead for many companies.

"You look at all that and it's hard to be wildly optimistic," Lucas adds.

Morningstar analyst Tom Corbett warns that just because newspaper stocks are selling at their lowest prices in years ? for many, their lowest ever ? they are not bargains.

"This is not a buying opportunity, simply because there's no visibility as to when we're going to get a turnaround in this ad-spending environment," he says, "and even when we do get a turnaround, we have no visibility on how it will benefit newspapers. The market always discounts what it does not know. And there are a lot of unknowns about the newspaper industry right now."

Gabelli & Co.'s Lucas agrees the way forward for newspapers is cloudy at best: "If I were smart enough to fix what's wrong with newspapers, I guarantee my name would be somewhere on the door here."