May 20, 2008 - While lenders and builders have been cruelly battered by a real estate market that seems to have no bottom, there's another industry group that suffers as much if not more: the newspaper business.

Looks pretty awful, doesn't it? Not if you're an investor with a longer term horizon.

Newspapers aren't going away. They are the local web that ties a community together, a source to stay in touch with what's going on as well as a venue for local advertisers to find buyers. Newspaper publishers may shrink more, but they're not disappearing. The community relies too much on them. Furthermore, astute newspaper management isn't publishing and hoping someone will buy their papers. The best ones are going into other media, especially television, radio and the Internet.

Newspapers are evolving. They have to for survival. Just putting out the newspaper everyday is a sure way to oblivion as readers get more and more news, ads, and information from other sources. And advertisers are using other media, away from newspapers, to get their goods sold, finding the Internet a powerful resource. It's only natural that newspapers go with the flow, go where the money is.

Costs are another reason for the evolution. Newspaper print costs more, though increases haven't been as strong as you might expect since less of it is being used. Shipping costs (think national dailies like the Wall Street Journal or USAToday) are higher as trucks fill up with expensive fuel. Newspapers are getting squeezed on both sides: lower revenues and higher costs. Sounds like a recipe for disaster.

For the moment it is. Many of the newspaper pubishers have seen their stocks cascade more than 90% as investors voted with their shares as to how they think the industry will do. They are right for the moment.

But if you believe the economy is going to return to somewhat normal over the next 12 to 18 months, you'll want to spend some time digging into newspaper publishers. Several still have good earnings, even in these difficult times. Some have high dividends, well covered by earnings, that should keep the stock price propped while you wait for better times. All the good ones have Internet connections, either directly or through joint ventures with established sites.

Examples of Web deals: Yahoo! brought several regional dailies online, featuring local content. That boosts the reach of the newspapers and should help sell more ad space. Another one: Monster Worldwide is in collaboration with many newspapers so employers in the local papers have a wider audience for their ads. Another: cars.com has partnered with many dailies to boost its content and in return give local car ads a bigger audience. On the television and radio side, many newspapers bought local stations, broadening the universe for ad revenues.

So the smart ones are surviving. When the economy recovers, and more specifically when real estate and auto industries come back, ad revenues will as well. And the first few months of the recovery will show extraordinary returns as publishers will have lower labor costs as well as lower operating costs (because of Internet and broadcast efficiencies).

When this will happen is the big question. If it takes too long, more damage will be done to balance sheets as losses grow or at best, profits shrink. If no recovery comes (has never happened in U.S. history), then all stocks are not worth owning. If the recovery comes 4 or 5 years down the road, then everybody from the government to corporate leaders has been asleep at the switch. My best guess is that within the next 2 years, the economy will be chugging along, taking many industries from the depths of despair to strong profitability. One of those industries will be newspaper publishing. It will take patience, but that patience should be well rewarded.

Some names to consider:

• A.H.Belo (AHC)
• Gannett Co. (GCI) - see our 5/21 Co. Spotlight
• Gatehouse Media (GHS)
• Journal Communications, Inc. (JRN)
• Lee Enterprises (LEE)
• McClatchy Co. (MNI) - see our new For Aggressive Investors column for more on MNI
• Media General (MEG)
• New York Times (NYT)
• Scripps "A" (SSP)
• Washington Post (WPO)

- Ted Allrich