Extra, Extra, The news about newspaper stocks is surprisingly good.

Indeed, the sector that every investing pundit loves to hate has been beaten to a bloody pulp over the last few years is starting to show signs of life, faint though they may be. Some investors, such as Warren Buffett see value here. Amazon founder, Jeff Bezos, the soon-to-be-owner of the Washington Post, seems to as well as does Southeastern Asset Management, a hedge fund that recently disclosed a 12% stake in the new News Corp. (NYSE:NWS), Rupert Murdoch’s print holdings such as the Wall Street Journal.

Old media giant Virginia-based Gannett (NYSE:GCI), the publisher of USA Today, has surged more than 50% over the past year while Apple, which symbolizes all that is flashy and cool in the modern world, has tumbled more than 32%. The rising tide has lifted smaller boats such as Lee Enterprises, whose properties include the St. Louis Post-Dispatch, which has more than doubled during the same time. McClatchy, whose 30 daily papers include the Miami Herald, is up more than 40% while Milwaukee Journal-Sentinel parent Journal Communications has spiked almost 30%. E.W. Scripps, owner of 19 papers such as the Memphis Commercial Appeal, is up more than 40%. Even the Grey Lady herself, the New York Times Co. (NYSE:NYT), has joined the party, posting a 15% gain.

Let’s get a few things straight. First, the industry fundamentals have been poor for a while and will remain so for years to come. Jim Boyle, managing director at SQAD, a media cost forecasting source, points out that newspapers accounted for 10% of domestic advertising spending in 2010, falling to second place behind broadcast and cable TV. The industry may fall to fifth place this year.

For many investors, these stocks have the potential to be value traps though if you are a gambling sort Gannett, which pays a healthy 3% dividend, may be worth a shot. Another stock to consider is the New York Times Co., which some expect to sell its headquarters building as a prelude to going private. News Corp. could go private if Murdoch doesn’t think Wall Street is giving the company enough attention, but that might not happen for a while if ever.

Benchmark analyst Ed Atorino, for one, does not see any light at the end of the tunnel for the sector.

“They don’t even know how long the tunnel is for newspapers,” said Atorino, who has followed the sector for two decades, in an interview. “There is no sign that there is an end to the declines anytime soon.”

But investors, are well aware of the “bad news” surrounding the sector. Below are three reasons why many of these stocks are on the rise this year.

1) Paywalls work -- Though some doubted that charging people for content that they had gotten for free would world, there is overwhelming evidence that paywalls have been a smashing success if people think they are worth the money. The New York Times alone reported a 40% increase in paid digital subscriptions in the second quarter. Unfortunately, advertising is continuing to decline at a faster rate than circulation revenue is advancing. Ad sales will level off eventually, but no one knows when that will happen.

2) The Buffet factor -- The Oracle of Omaha has invested in the newspaper sector for years through his long-time position in the Washington Post Co. Last year, he upped the ante buying 62 papers from Media General for $163 million. His spree focused attention on another Buffett favorite, Lee Enterprises. Its shares have been bid up on the expectation that he would take that company over as well. Though that hasn’t happened yet, Buffett did recently refinance the publisher’s $94 million in debt. Investors don’t realize Buffett’s interest in the sector is selective. He is only interested in titles that serve mid-sized markets that don’t attract significant competition.

3) Diversification --- If Gannett’s plan to acquire Belo is approved by regulators, it will transform the company from a newspaper publisher that dabbles in television to a station owner with paper investments. That certainly is the case of Journal Register, which owns 15 television stations and 35 radio stations in 12 states, and Scripps, which owns more than a dozen stations.. Whether they will follow the lead of the Tribune and split off their newspaper holdings is tough to say. Though papers are selling, the prices they are fetching are a small fraction of what they were 5,6 years ago

Bottom Line

For most investors, the rewards in newspaper stocks aren't worth the risk. But if you are willing to gamble on Gannett and the New York Times, they may be worth a shot. Keep in mind, that the stocks have been volatile in the past and will continue to be so in the future.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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