Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

NEWM And MNI: Can Newspaper Stocks Continue To Surge Higher?

|Includes:DS, MNI, New Media (NEWM)

Newspaper stocks such as New Media Investment Group Inc (NYSE: NEWM) and The McClatchy Company (NYSE: MNI) have made shareholders wealthy in recent times. The big question for investors now is whether to maintain holdings in these stocks or book the profits. Here is a closer look.

New York based New Media Investment Group has increased shareholders' wealth by 38 percent since February when it was spun off from Newcastle Investment Corp (NYSE: NCT). New Media claims to operate a wide portfolio of products including 435 community publications, 353 related websites, and six yellow page directories.

First quarter results are usually the weakest of the four quarters and thus, a quarterly loss of $6.7 million didn't surprise the market. However, the 8.3 percent growth in digital revenue was seen as a green shoot, even though overall quarterly top line declined by 2.8 percent. In the subsequent months of its listing, R. F. Lafferty and Compass Point have initiated coverage on the stock with 'buy' ratings and target prices of $19.5 and $18 per share respectively. The stock's valuation of 8 times its forward earnings speaks for the stock's undervaluation and attractiveness and is a strong indicator of headroom for further growth. With a clear downside opening for print advertising, most newspapers are finding it difficult to maintain viability; however, New Media's relatively strong footing in the digital space is a big positive.

The McClatchy Company is a classic case of a turnaround seemingly gone awry. The stock had a strong bull run last year as the company's operations continued to recover. However, it seems to have slipped in the first quarter of 2014 with losses widening to $15.8 million from $12.7 million in the same period a year ago. Not surprisingly, the stock saw a correction following the earnings announcement.

On the flip side, March quarter is hardly a benchmark for newspaper stocks and McClatchy should be offered the benefit of doubt. Without doubt, the stock is not for investors with a weak heart. Its high debt exposure, underlined by the debt equity ratio of 6.7, can crush the turnaround prospects any day. A matter of solace is the recent correction which has rationalized valuation. The stock is currently valued at a forward earnings ratio of 13.5 and there might be better options for risk averse investors. McClatchy Company can eventually turn out to be a multibagger when it turns around, but there would be understandably some twists before that.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: NEWM, MNI, DS