There's an old saying among the chattering classes: Freedom of the press is guaranteed only to those who own one. But for at least the last year and a half, the question has been: Who would want to?

Over the past three months, though, a strong rally in newspaper stocks suggests that there might be life yet in a business long pronounced dead by many investors and pundits.

Everyone knows the story line: The Internet plus Google plus the financial crisis plus the recession equaled a host of presses either on the brink of bankruptcy or fully in it. Investors fled newspaper stocks to such a degree that, at one point, a share of


(MNI) - Get Report

cost less than the cover price of one of its dailies (the

Fresno Bee

, for example).

The death of another industry was being mourned; the obits writers were filing their copy.

And then came this summer. In their second-quarter earnings conference calls, executives at several companies --

USA Today



(GCI) - Get Report

, the

New York Times

(NYT) - Get Report

and McClatchy chief among them -- hinted that the worst had arrived and, along with it, a bottom to the most vicious ad recession in the history of newspapering.

All those layoffs -- more than 30,000 industrywide since mid-2007, according to some estimates -- and all that cost-cutting produced earnings that surprised just about everyone.

Meanwhile, the Fed chimed in to say the recession was "likely over." Momentum traders sought out beaten-down cyclical stocks as improving economic-data trickled in. Stocks rose, credit markets thawed, and debt-ridden newspaper companies were able to refinance. Stocks went higher still. Shorts got squeezed.

The result? Times shares up 74% since July.

A.H. Belo

(AHC) - Get Report

up 255%. Gannett 290%,

Journal Communications



Lee Enterprises

(LEE) - Get Report

470%, McClatchy 555%.

Granted, most of these stocks were trading so low -- all but the Times and Gannett were under a buck, Chapter 11 seemingly priced in -- that the percentage gains are a bit misleading. And you know asset values have reached an absolute pit when the most bearish constituency possible all of a sudden sees a buying opportunity: When Gannett shares were trading at just above $3 in July, even laid off company employees of the most disgruntled kind posted messages on the open forum of, an independent web site that tracks company-related news. The posters were saying, in effect: At this price, I ought to get in.

And so the newspaper-stock rally is perhaps not so surprising. But the depths to which the industry had fallen, and the inherent problems that still befog the very business model of the newspaper, raises a host of concerns. Chief among them: How much has the rally been based on fundamentals and how much on technical reasons, such as a cyclical bounce in front of a hoped-for recovery, or the buying of momentum and speculative traders, or short squeezes? (Some 21% of Gannett's float was in the hands of short sellers as of Sept. 10.)

Put another way: Have these stocks reached a top? Is it too late to get in?

One interested party says no way. He's John Rogers, founder and CEO of the Chicago small-cap value fund Ariel Investments, which owns big positions in three newspaper chains: McClatchy, Lee and Gannett. Ariel, in fact, is Gannett's largest institutional shareholder.

His argument runs thusly: The cost-cutting put in place by these companies in particular has been so severe that, with any revenue growth at all, their "earnings power is going to be much higher than people think," he says. "I think these stocks can still double from here, easily."

Still, Rogers isn't buying any more newspaper shares at the moment -- though he says he's holding off because of portfolio weighting more than anything else. His timing, anyhow, was impeccable. Ariel started adding to its Gannett stake in the spring and early summer.

But neither does Rogers have any intention of selling out and taking profits. A true buy-and-holder, he is a believer in the long-term viability of the newspaper business, at least when it comes to small-town and community papers, which have less competition from other forms of media, the Internet included. (Print ads remain the best way for local businesses to entice traffic, he says -- which of course is why they still command a much higher rate than digital versions.)

Some statistics bear out this view. A trade group representing community and small-market publishers, the Suburban Newspapers of America, said ad sales fell 3.6% among its members, not nearly as bad as the 18% decline experienced by the entire industry.

At bottom, Rogers' investment thesis -- and much of the recent optimism surrounding newspaper stocks -- is predicated on publishers eventually "recapturing" some if not most of the ad revenue, some $20 billion annually, according to some figures, that they lost during the recession.

That, however, is a six-column, banner-headline-size "if."

To be optimistic about newspaper stocks, says Ed Atorino, an analyst at Benchmark, "You have to have faith that the worst is at hand," and that a recovery will take hold late next year and in 2011. "But at the moment that's wishful thinking," Atorino continued. "Nothing from any individual newspaper company would suggest a turnaround is anywhere near happening."

Take Gannett. When the company "preannounced" third-quarter results earlier this week, the better-than-expected profit lifted share prices across the whole sector. As has been noted, the surprise profits have come from a series of radical cost-saving measures, including some 5,500 job cuts of one stripe or another (layoffs, buyouts), not to mention shrinking the physical papers themselves, removing sections and shuttering whole news organizations (it closed the

Tucson Citizen

in May).

Furthermore, Gannett projected its third-quarter revenue -- the most meaningful metric right now, arguably -- at about $1.3 billion, lower than consensus estimates by at least $600 million. Compared with the year-ago third quarter, which itself was wretched, that would amount to a revenue decline of 19.5%. It also represents a quickening of top-line deterioration: In the second quarter, Gannett suffered an 18% drop in revenue.

At what point, then, will the slide truly end and a solid recovery take hold, not just for Gannett but for the entire sector? Over the short-term, one indicator will be the relative health of retail, an industry that used to deliver about half the ad revenue taken in by newspapers as a whole.

The holiday season thus looms large, but retail watchers expect flat sales in 2009, maybe a slight increase over last year. Recent weak consumer confidence data would seem to offer further reason to worry. The same can be said of the automobile and real estate sectors, both big spenders on print-media advertising (or, rather, former big spenders).

As far as classifieds go, which at one time constituted as much as 40% of newspaper ad revenue, the Internet has all but destroyed that line of business. This has been especially damaging to the larger metro dailies, where classifieds were once a cash hog.

And so it becomes a wait-and-see, and not just for holders of publicly traded stocks.

Newspaper asset values have been so demolished, no matter whether they're private or public, that some have wondered whether consolidation and dealmaking might again enter the industry. As of now, however, the point is moot. Public companies either don't have the balance sheets or the stomachs to seek acquisitions, while interested private-equity players and the banks who do the lending are in Missouri mode: show me.

Says Larry Grimes, a media investment banker with W.B. Grimes in Maryland, "In talking to the banks and the PE guys, I think they want the newspapers to prove that they can rebound, that they can recapture some of this lost revenue" before these investors seriously pursue press ownership.

Recessions have always hit newspaper companies hard, so it makes sense that the Great Recession would take a heavy toll on the industry. But the key fact remains: even before the bust, the business model was under siege. Now, as industry executives scramble to slash costs


figure out a way to make money from their web sites, almost no one believes that the industry will ever go back to minting money like it did for most of the twentieth century.

As Warren Buffet, lover of newspapers and owner of the

Buffalo News

, said this past May, "For most newspapers in the United states, we would not buy them at any price. They have the possibility of going to just unending losses."

He did, however, use one qualifier: "most." If you want to own a press, the key is to find those few that are still worth owning.

-- Reported by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.