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Derided as irrelevant antiques in recent years, newspapers have made an ironic comeback. Senior Bush administration officials didn't call bloggers, after all, to complain that war critic Joseph Wilson had a wife at the CIA. Instead, the officials attempted to co-opt The New York Times, Chicago Tribune and Washington Post, along with Time and NBC.

An odd compliment, certainly. But even that attention is refreshing, as newspapers have grown more accustomed to neglect, most notably from Wall Street. Shares of major national newspaper chains, such as The Washington Post ( WPO) and Gannett ( GCI), are down 10% to 30% in 2005. All have lagged the broad market, as circulation and ad revenue are in freefall.

On Tuesday, the largest institutional holder of Knight Ridder ( KRI) made the ultimate cry for help, telling executives via a public filing that they had failed so miserably to unlock the company's value that they should sell it immediately.

How have we come to this crisis of investor confidence, and what are the prospects for this integral piece of our democracy? Consider the following perspective.

Shrinking Readership, Revenue

It's a random Saturday morning, and after an evening of watching a baseball game on television, reading about it online and talking about it with friends over instant messenger, I pad out to the to the rain-soaked steps in front of my house in my socks and eagerly grab the newspaper. I tear the wet plastic sheeting off the rolled up paper, snap off the rubber band, and plop down in front of a fire with a cup of coffee to read it.

Even though it's only The Seattle Times, not quite one of the world's top 10 newspapers, this uncomfortable sock-soaking adventure is counted as a great pleasure. I've spent a decade writing and editing online, but scanning the newspaper -- skipping my eyes over headlines without having to do any clicking, imagine that -- is still something I value and enjoy. In fact, if news were only available online, the home delivery of a full-blown, hard-copy version of the product might be seen as a fantastic innovation. And at 35 cents a copy, subsidized massively by advertising, it's a real bargain, too.

Quite obviously, I am part of a shrinking minority. In 1991, the Los Angeles Times, where I was then an editor, gave employees coffee mugs celebrating the milestone of hitting 1 million in daily circulation and becoming the nation's largest metro daily. Today, the circulation is 5% lower and dropping. And as circulation has plunged, so have mass-market classified and help-wanted advertising revenue.

Consider newspapers victim 1A of the Google Economy. Before there were search engines with targeted advertising, there were full-page newspaper spreads advertising the latest white sale at Sears. When consumers wish to buy a house or motorcycle, rent an apartment or find a job today, they are much more likely to visit Homestore ( HOMS), eBay ( EBAY), Craigslist or Monster Worldwide ( MNST) than slip 50 cents into a newspaper rack. Online search pinches the pricing of everything newspapers once viewed as their lifeblood.

Younger people have no nostalgic or personal connection with newspapers, and according to industry research they are not inclined to ever pick them up. Even as newspaper companies have branched out into owning magazines, broadcast television and cable, they have never found a marketing angle to bring youths into the fold for their principal business units.

Buggy Whips or Railroads

It's as if Coca-Cola ( KO) had never found a way to sell soda to the children of its original buyers. Major media conglomerates outside of newspapers, such as Viacom ( VIA), discovered a path to the future via cable-television programming such as MTV and Nickelodeon. But newspapers are stuck with the massive, costly infrastructure to make and deliver a product that has virtually no relevance to the audience that its sponsors -- retail, entertainment and automobile advertisers -- most covet: 18-to-35-year-olds.

And frankly, there is no compelling reason for that audience to change its current behavior, as the alternatives are, in most cases, less expensive, more flexible and far more useful.

Rather than purchasing newspapers, this key segment of the consumer economy, according to researchers, is reading news and blogs online, and watching television. Their approach to news and commentary has progressively narrowed in a way that is similar to European tastes. They are viewing reports from conservative or liberal providers with whom they are already inclined to agree, and ignoring alternative views.

That doesn't mean that newspapers are dying just yet. Yet their revenue growth is virtually nil, and profit growth -- which is what investors tend to pay up for -- is being achieved primarily via cost-cutting and accounting magic. All large newspaper chains have repeatedly guided their revenue expectations down this year, in fact, as they have been assaulted with higher input costs across the board, from newsprint (up 10%-plus this year) to gas for delivery trucks.

You might think witnessing this sort of corporate disintegration is akin to seeing buggy-whip manufacturers disappear. Yet there is an important distinction. Although investors put railroads out of their minds after the advent of jet aircraft and truck travel, those rail carriers have found their own place in the financial ecology, as low-cost haulers of large loads. Newspapers will, no doubt, also ultimately settle into their own place as the bulk provider of low-cost advertising targets.

Testing Investors' Patience

Some of the country's top value buyers have been high on newspapers for several years. Bruce Sherman, head of the successful Private Capital Management Group -- early owner of Qualcomm ( QCOM), Apple ( AAPL) and Computer Associates ( CA) during their grimmest years -- has touted the fantastic cash flows of newspaper chains.

The money-management firm, now a unit of Legg Mason, is the largest institutional holder of Gannett, with a 5.8% stake, and of Knight Ridder, with a 19% stake. In a public filing on Tuesday, Sherman wrote: "We view the best interests of the shareholders as being served by the Board soliciting competitive bids for the Company, either from financial buyers willing to pay fair value or industry participants that would realize synergies and increased market presence through the acquisition of Knight Ridder's highly desirable local newspaper and online advertising assets. ... We understand through publicly available material that Company management has, on several occasions, determined the Company's break-up value to be substantially in excess of the current share price.

"While we are not putting a specific break-up or fair market value on the Company's assets at this time, based on what we observed of other shareholders invited to address the Board at its July meeting, we think that we are not alone in believing that the Company's fair value significantly exceeds its current share price."

Sherman told me two years go that he believes the papers represent significant underappreciated value and would make him a lot of money. They're down quite a bit since then, but Sherman is a very patient man. Knight Ridder shares rose 6% in response to his filing on Tuesday.

One newspaper stock that contrarians may wish to consider is Tribune ( TRB), which suffered an unbelievable setback recently in connection with its 1998 purchase of Times Mirror, the corporate parent of the Los Angeles Times. With that deal, it obtained a $1 billion tax liability that its lawyers wrongly believed could be settled with little financial impact. They were wrong, and the company -- which owns a large stake in the WB Network as well as the Chicago Cubs baseball team -- has seen its stock price fall to $30 from its 2004 high of $52.

Analysts are still decidedly negative on Tribune, which has also suffered through an embarrassing circulation scandal at Newsday, its property in suburban New York. But note that it does appear to be on the road to recovery via cost-cutting and circulation stabilization. Leland Westerfield, an analyst at Harris Nesbit, said he sees the company edging back into respectability in 2006 via solid TV revenue growth and the influx of political advertising.

"We expect value and turnaround-investor attention to increase as the company 'proves it' going forward," he wrote in a note to clients late last month. Westerfield is looking for 3% revenue growth and 9% cash flow growth in broadcasting, and 3% and 5% respectively for the publishing group.

It's kind of sad that those kinds of very modest goals stand out as bullish. For a newspaper company with a lot less far to go in its rebound, consider E.W. Scripps ( SSP). One of the few in the group that has managed to keep up with the times, Scripps owns papers in smaller towns, such as the Corpus Christi Caller-Times in Texas and the Albuquerque Tribune in New Mexico.

Local markets have generally held up better than large metropolitan markets, as regional advertisers continue to find small-town newspapers the best way to reach shoppers of local consumables, such as movie tickets, used cars and local service jobs.

Scripps got into the broadcast television and cable programming game quite early and has done well with Home & Garden Television and the Food Network. More recently, it purchased the Internet shopping comparison site Shopzilla, and it plans to roll the brand out across its media assets. The company is probably only going to grow revenue in its publishing group at 4% to 5% over the next year, but with its strong electronic properties it will likely continue to merit a premium price-to-earnings multiple in coming years.

Papers are probably unique among major corporations in that their principal product -- news reporting -- is nothing but a cost center and loss leader. Yet the CIA leak case has shown that reporting is a necessary burden to media organizations who still consider themselves responsible for advancing the democratic process. Over the next year or two, they probably have a better-than-even chance of making contrarian investors a buck at the same time.

Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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