In June, Warren Buffett made some eyebrow-raising news by purchasing 63 newspapers from Media General (MEG). Instantly came the twin reactions that the old man had finally lost his mind or that he was once again shrewdly pouncing on an unrecognized opportunity.
I'll go with the latter, with the caveat that there's a speculative cast to the deal. The question for investors is whether it's a reason to invest in Buffett's Berkshire Hathaway (BRK.A)(BRK.B) or to mimic the investment.
The answer to the first question is no. The answer to the second question is that you shouldn't even try.
The tempting and logical premise is that Buffett sees a quiet bargain in yet another old industry that would appear to have been eclipsed by technology. Thus immediately came headlines like, "Did Warren Buffett Just Save the Newspaper Industry?"
No, he did not save the newspaper industry. What Buffett did was mentally bifurcate that industry and then invest in one segment of it: community, as opposed to metropolitan, newspapers. He drew a critical distinction between the two.
What he saw is what Bert saw.
In the mid-1990s, I asked a budding entrepreneur named Bert why he had recently chosen to start his first newspaper in Eudora, Kan. instead of De Soto, Kan., the latter being a similarly sized town that is five miles closer to metropolitan Kansas City. He told me that after evaluating both towns, he concluded that Eudora "had a better sense of community."
Fast forward to May 29 of this year, and here's Warren Buffett, speaking to CNN Money:
In towns and cities where there is a strong sense of community, there is no more important institution than the local paper.
There it is in a nutshell: Buffett is one of the world's great investors because, among other traits, he sees the big picture by being willing to step into the same shoes as an entrepreneur who is only concerned about his mom & pop enterprise. Just as the linchpin for Bert was a "sense of community," so did it also become for the great Warren Buffett.
But Buffett drilled down even further, and found that this "community" characteristic does not apply to large, metropolitan newspapers. Therefore, he effectively signaled "no interest" to the Los Angeles Times when he told one its reporters:
If you live in South Central Los Angeles, you're not interested in who dies in Beverly Hills. In Grand Island, Nebraska everyone is interested in how the football team does. They're interested in who got married.
And they're interested in seeing pictures of their kids at the school picnic or the Cub Scouts awards ceremony - pictures that were probably taken by mom or dad and then submitted to the paper with a little homespun write-up. They're interested in such meaningful small-town news items as the Joneses having Sunday dinner with the Johnsons. They're interested in knowing that Fred, who owns the hardware store, caught a three-pound catfish last Tuesday evening using night crawlers as bait. And they enjoy seeing a picture of Fred with his catch, a picture that would be deemed un-newsworthy by any big-city paper.
Buffett has clearly in his life ventured a few miles outside of Omaha to burgs like Ashland, Blair and Wahoo, Neb. He knows the important and differentiated role that the local newspaper plays in those communities. He understands that with a "sense of community" comes a sense of "community ownership of the local newspaper." It's the community's diary, its photo album, its chronicle of present-day history. And because he rigorously eschews generalizations in his analysis, he perceptively distinguished between those papers and big-city papers.
Sure, Buffett remains invested in some metropolitan newspapers, including The Washington Post and The Buffalo News, but those are legacy holdings bought years ago. He even bought his hometown Omaha World-Herald last year, and that may have been little more than a civic-minded gesture. But his buy from Media General was a hard-nosed business decision, if a rather speculative one. It jibes with his "moat" criterion, his preference for investments that are effective monopolies. And at a valuation multiple under 5x, half that of the prevailing P/E of a few years ago, he doesn't appear to be overpaying.
But even Buffett isn't sure about that. He knows he's not buying undervalued hard assets or a discounted current revenue stream. He even admits that most of his new papers will continue to lose money for a while. Moreover, he's aware that community newspapers are trying to figure out a business model that at once co-opts and also competes with the Internet, just as their big-city brethren are. Buffett told the New York Times.
I do not have any secret sauce. There are still 1,400 daily papers in the United States. The nice thing about it is that somebody can think about the best answer and we can copy him. Two or three years from now, you'll see a much better-defined pattern of operations online and in print by papers.
That's a speculation that Warren Buffett can afford, especially on a tiny (for him) $142 million outlay. But an ordinary investor just can't prudently ride the Oracle's coattails this time.
First of all, there is simply no reason to invest in Berkshire as a direct result of this minor foray. Buffett, himself, said that while he believes it is a good investment for his company, "It's not going to move the needle at Berkshire."
Secondly, there's no replicable investment that is available, at least none that should be appealing to an ordinary investor. The closest thing to a pure-play in non-metro newspapers is GateHouse Media (OTC:GHSE), which lost $21.6 million last year and has a book value of minus-$14.15 per share. Taking a flyer on that semi-pure-play is a thoroughly-pure speculation, not an investment.
Other mostly-newspaper public companies are simply too dissimilar from Buffett's Media General buy. They're primarily big-metro paper outfits, like A.H. Belo Corp. (AHC) (which lost $10.9 million last year), Lee Enterprises (LEE) (lost $146.8 million last year), and The McClatchy Company (MNI), which actually made $54.4 million last year but is seen growing its earnings at only a 5% rate over the next five years. If McClatchy's modest earnings forecast is a compelling prospect for you, fine, but there are better investment ideas out there. Besides, McClatchy's metro-paper orientation (Charlotte, Kansas City, Sacramento and Fort Worth) is the very element that Buffett has excised from his newspaper theme.
It's a fashion to monitor Buffett and then replicate his moves. This time, however, what is a good investment for him is simply not available to others. Nor should it be misread as a buy signal for the entire newspaper industry.
Disclaimer: The author owns several business and law-related newspapers as well as an advertising company that has, within the past year, conducted business with Lee Enterprises, Inc., GateHouse Media, Inc. and The Omaha World-Herald. The author has no holdings or any near-term plans to initiate holdings in any of the stocks mentioned.