Sell These 10 Stocks Right Now.
Tuesday, March 20, 2007 | Dylan Jovine
IT'S TIME TO SELL ALL OF YOUR NEWSPAPER STOCKS.
I came to this conclusion after reading an article about the Tribune Company (SYM: TRB) that stated the following:
"Currently, the board is proposing to recapitalize the company, sell off its TV stations, and pay a sizable dividend to shareholders - in a deal where it would also buy out the Chandlers, who hold a 20% stake."
A long-time controlling family trying to sell its stock is bad enough, but a "recapitalization" like this is something far worse.
Indeed, a recapitalization like this can be viewed as a "Vampire Recapitalization" because all of the blood (cash) is sucked dry from the company, oftentimes to the point where you have nothing left but a corporate corpse.
Let me explain.
"Recapitalization" simply means that the debt to equity ratio of the company is going to be tweaked for maximum benefit to investors.
Some companies have very good reasons for recapitalizing. A great example is when a company sells shares (equity) to raise money to lower/pay off its debt.
But a "Vampire Recap" is usually a 3-step process that goes something like this:
Step One: Issue as much debt as the company can handle.
Step Two: Take the cash you got from issuing the debt and any other excess cash you have and pay yourself a large dividend.
Step Three: Sell all of your stock.
As you can see, this is usually a sign that management doesn't believe in the long-term prospects of the business anymore and is running for the exits.
But a plan like this only works if new shareholders are willing to buy out the old shareholders.
And since many of the largest institutional investors on Wall Street are staying as far away from newspaper stocks as they can, that leaves one alternative: individual investors.
That's right. Plans like this only work when individual investors are persuaded to buy shares of the company, usually by a big name investment bank handling the transaction.
A good recent example of this is when parent company Viacom (SYM: VIA) spun out Blockbuster Video (SYM: BBI) to the investing public.
First, parent company Viacom loaded Blockbuster with $1 Billion in debt.
Second, Blockbuster paid a 1 Billion dollar "dividend" to parent Viacom.
And third, Viacom spun out Blockbuster and sold all of their shares in a public offering, largely to small individual investors.
Now, I'm not saying that I wouldn't do the same thing if I were the Chandler family, and I were watching my business slowly atrophy. In fact, I would argue that they're doing exactly the right thing - for themselves!
But my job isn't to advise the Chandler family - it's to advise individual investors like you who've been getting burned by antics like this since the beginning of time.
That's why I suggest staying as far away from these stocks as possible (for all you value players), and if you do happen to still own shares that were left to you by your grandmother, sell them immediately.
Furthermore, I've spent a lot of time debating the future of the newspaper industry, and at this point, I can only suggest avoiding these stocks like the plague.
It's not that I don't think certain companies will survive (and perhaps one day even thrive).
Indeed, if some of the national players like Dow Jones and Company (SYM: DJ), the New York Times (SYM: NYT), Gannett (SYM: GCI) and the Washington Post (SYM: WPO) can break out of their own institutional thinking, they may find a way.
But in my opinion, the smaller/regional players have it especially rough: Journal Communications (SYM: JRN), Lee Enterprises (SYM: LEE), McClatchy Co. (SYM: MNI), Media General 'A' (SYM: MEG), E.W. Scripps (SYM: SSP), Sun-Times Media Group (SYM: SVN) and, of course, Tribune Company.
Whether these companies face 10-foot hurdles (national publishers) or 20-foot hurdles (regional publishers), this is not a place for individual investors to be hanging their hats.
So when you get the next phone call from your broker with the "hottest offering of the year," and it happens to be a newspaper stock, keep the following Groucho Marx expression in mind:
"I don't want to belong to any club that would have somebody like me for a member."
Have a great week.
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Dylan Jovine
Chief Investment Officer
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