Sources of the newspaper stock rally

Tracking newspaper stocks lately has been more than interesting. Since mid July, many of the publicly traded stocks have mounted rallies far in excess of the general stock market rally. From July 10 to August 24 (chart), Gannett (GCI) is up 156%, AH Belo (AHC) is up 290% and McClatchy (MNI) is up 364%. Some stocks in the basket are up less, like the New York Times (NYT) up a mere 67%. The real question in my mind is why these companies have come back from the brink and delivered some startling returns.

A few of my thoughts:

1. Dare I say that the sector was beaten down too far? While no one questions that these companies are in serious trouble, the question is how much runway they have before the point of no return. With bankruptcy from Tribune and looming issues at other papers, it seemed the end was perilously close. However, there might be a bit more room than everyone thought six months ago. It wouldn't have surprised me to see a major city without a daily by the end of the year if you'd asked me a few months ago. Right now, that seems at least a bit further off.

2. Public plans to start charging for content on the Internet give some more hope that news organizations can find a sustainable business model after print. While I remain unconvinced about public willingness to pay for news content, even the notion of experimenting is hopeful for the sector.

3. There is real asset value in all of these companies. Sure, many are saddled with debt, but they do own some real valuable assets they have been able to accumulate during their best times. Real estate, venture investments, and other assets like art or sports teams. For a while it seemed like newspaper companies were willing to jettison it all at fire sale prices to keep the core afloat. Unfortunately, they were doing it at the worst possible time. The extended runway (see 1 above) lets them wait a bit more for an opportune time to sell if the need be. I recall hearing absurd valuations for assets like cars.com which is owned by shared interest from a number of newspaper companies.

4. Gannett and McLatchy performed well ahead of expectations, at least in terms of earnings. I'll admit a strong bias toward topline goals, so this one impresses me the least since they missed in revenue, but scored well in expense reductions. The story is that the companies have done a better job managing expenses than expected, and are prepared to weather more bad times. If times turn around, they'll be in that much better shape. Since there's somewhat a feeling of recovery, this translates into a buying and growth opportunity.

5. There's still interest in newspapers. While deals aren't getting done yet, there are still a great number of people that want to give publishing a go. A few papers could get swapped, sold or spun off in the near future. Oddly enough this "exit" could be good for shareholders who get to claim future value in one quick transaction. To me, this is the biggest driver of all. However, without the ones above it doesn't really matter.

Even with all of the reasons above, I'm still not bullish on the sector. It's my guess that a couple of these companies will do well, but most will return to the slow slide. I just couldn't tell you which one or ones is likely to be the winner(s).