Time to Buy Newspaper and Movie Theater Stocks -- Buzz Zaino, Royce Opportunity Fund

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Popcorn, Soda, Shrek III and Old Media -- Interview with Buzz Zaino, Manager, Royce Opportunity Fund by Sandra Ward

Summary: Buzz Zaino runs the smallcap Royce Opportunity Fund, and has produced average returns since 1998 of 16.2% versus 7.2% for the Russell 2000. His best idea: movie theater chains. Three or four years ago, movie theater chains were hit by overexpansion and overinvestment, resulting in bankruptcies and mergers. But the businesses are characterized by "terrific cash flow" and no inventory. Profits are generated by sales of popcorn and other extras, and are therefore leveraged to the number of moviegoers. Box-office receipts are up year-to-date by 7.2% and three new movies -- Shrek III, Pirates of the Caribbean Part III and Ocean's Thirteen -- should lead to healthy ticket sales. And the conversion from analog 35mm to digital projectors should allow theaters to bring in more customers by adding additional programming. Movie theater stocks generally trade at about 8x EBITDA, a fair valuation; upside will come from unexpectedly strong cash flows. Picks:

• Cinemark (CNK) -- "broken IPO" in April; indicated it will pay a dividend of almost 4%.
• Regal Entertainment Group (RGC) is financially healthy, absorbing other chains, and pays a nearly 6% dividend.
• Carmike Cinemas (CKEC) recently came out of bankruptcy; 75% of its screens are already digital; pays a dividend.

On newspaper stocks, he says that sentiment is overly pessimistic despite the fact that the stocks generate healthy cash flows (though he recognizes the risk that they are a value trap). The election next year should lead to increased newspaper readership. Picks:

• Journal Register (JRC): Trading at 8x earnings, highly leveraged to housing and auto sales for advertising, both of which are weak, yet "cash flows are excellent".
• McClatchy (MNI): Even on lower projected earnings the stock is trading at a lower forward P/E than ever before. Strong book value and cash flow, and growing Internet presence.