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Hedge Funds, Big Banks Buying This Stock

Hedge funds and big banks are snapping up SuperMedia, which is making a clean start.
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BOSTON (TheStreet) -- Hedge-fund managers including David Tepper of Appaloosa Management and John Paulson of Paulson & Co. and the asset-management units of JPMorgan (JPM) - Get JPMorgan Chase & Co. Report, Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. Report and Bank of America (BAC) - Get Bank of America Corp Report have been snapping up SuperMedia (SPMD) - Get SPDR Portfolio S&P 400 Mid Cap ETF Report, a yellow-pages publisher spun off from Verizon (VZ) - Get Verizon Communications Inc. Report in 2006.

SuperMedia declared bankruptcy in March 2009 after Verizon saddled the small-cap company with $9 billion of debt. Shareholders were wiped out, while senior secured creditors received new debt and 85% of the new common stock. Despite a record of shoddy shareholder treatment, hedge funds were eager to build stakes in the reorganized company, whose shares have fallen 22% during the past month, underperforming U.S. stock-market benchmarks.

In addition to printing yellow pages, SuperMedia runs Web, advertising and direct-mail businesses. It designs custom advertising plans for small and mid-size businesses. As online advertising becomes localized, SuperMedia could profit from a migration of businesses on to the Internet.

The effects of restructuring are visible in the quarterly report. General and administrative expenses decreased 58%, and selling expenses dropped 45%. The cash balance grew 38% to $294 million. Long-term debt was slashed from $9 billion to $2.7 billion.

SuperMedia's adjusted performance differs substantially from its GAAP numbers since the company is still in the process of reestablishing its business and is therefore suffering one-time charges. Adjusted net income declined 3.8% to $25 million, but adjusted earnings per share soared from 18 cents to $1.69 due to a new equity base, which is miniscule in comparison to the pre-bankruptcy float. Given how many hedge funds are buying into this turnaround story, SuperMedia is worth consideration.

The stock's valuation is compelling. Just one sell-side firm,

Oppenheimer

, covers SuperMedia, rating it "buy" with a $50 price target, implying that a 47% return looms. There are reasons to believe that Oppenheimer's upside estimate is far too conservative. It expects SuperMedia to tally $10.63 of adjusted earnings in 2010, giving its stock a price-to-projected-earnings multiple of 3.2, an obscene 81% discount to the media industry average. The stock's 0.2 price-to-sales ratio reflects a 90% markdown.

The discounts are explained by SuperMedia's focus on print publications. SuperMedia is an old-media company in a new-media world. It still derives the vast majority of its revenue from phone books, which are obsolete for Internet users. SuperMedia's investors are betting that phone books will last longer than the market expects and that the company will be able to successfully build new and profitable businesses by transferring its data online and helping small businesses achieve localized marketing on the Web.

This thesis isn't far-fetched. For many a small business, paying for a yellow-page listing is its only advertising and its only marketing relationship is with SuperMedia. This company might wield the country's largest rolodex of local businesses that need to adapt their brand to the Internet. Even if SuperMedia isn't outstanding at doing this, it already has the relationships in place to book sales. Also, the death of old media has been greatly exaggerated.

And guess who has already profited off old media's determined persistence? Many of the hedge funds that are now betting on SuperMedia. Direct marketer

Valassis Communications

TheStreet Recommends

(VCI)

is another old-media straggler that the market deserted. But lawsuit wins against competitor

News Corp.

(NWSA) - Get News Corporation Class A Report

and a profitable turnaround in 2009 proved the bears wrong. Valassis Communications shares have returned 492% during the past year, boosting Appaloosa Management's portfolio, among others'.

SuperMedia is a similar investment. Its risk-reward proposition is lofty. The stock should only be considered by investors with speculative capital. But considering its roster of advocates and its priced-for-extinction value, SuperMedia deserves attention. John Paulson and David Tepper have personally netted billions during the past few years. Paulson shorted the subprime mortgage market in 2007 and then went long financials in 2009. Tepper has repeatedly earned windfalls by investing in distressed companies.

Add Louis Bacon, of

Moore Capital Management

, who has consistently ranked as a top hedge-fund manager since the '90s, and you have a who's who of Wall Street gurus betting on SuperMedia. These billionaires are good company for individual investors trying to turn a quick buck. Of note, Paulson's equity stake is due to a stand-by-purchase agreement from 2009, so he has been an investor for quite a while and offered to buy out previous debt holders, offering them cash in exchange for the new equity.

Considering that previous debt holders reaped 85% of the new shares, it's safe to assume that several of the hedge funds listed above were, like Paulson & Co., debt holders that smelled blood in the water and foresaw, and perhaps influenced, a self-serving restructuring. The profit motive is the name of the game for hedge funds, and SuperMedia, less $6.3 billion of long-term debt, is a stock that's ready to come back to life.

-- Reported by Jake Lynch in Boston.

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