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.

Related Articles
  1. Economics

    How Warren Buffet Made Berkshire Hathaway A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  2. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  3. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Retirement

    Warren Buffett's Investment Lessons for Retirees

    For those in retirement, Warren Buffett's clear, timeless advice on investing is worth a look.
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  1. Why do some stock quotes appear in bold print in the newspaper?

    When it comes to keeping track of a stock's movements, many investors still look up the latest data in the local newspaper. ... Read Full Answer >>
  2. Is the Wall Street Journal considered to be a conservative publisher?

    The Wall Street Journal is controlled by Rupert Murdoch via Dow Jones Publications, which in turn is owned by Murdoch's News ... Read Full Answer >>
  3. Who actually owns the Wall Street Journal?

    The Wall Street Journal is owned by media magnate Rupert Murdoch, who purchased the company for $5 billion in 2007 through ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Trading Center