Magazine article Editor & Publisher

Thank Short Sellers for the Rally in Newspaper Stocks?

Magazine article Editor & Publisher

Thank Short Sellers for the Rally in Newspaper Stocks?

Article excerpt

What accounts for the remarkable run-up in the share prices of newspaper companies over these past two weeks?

Stocks that had been thoroughly beaten to a pulp, losing as much as 97% of their value over the past year, are now rebounding with double-digit gains nearly every trading session. Most interestingly, it's the companies most punished by the market -- such as Lee Enterprises, The McClatchy Co. and Media General -- that have gained the most in this newspaper-sector rally.

The narrative favored by most business journalists is that newspaper companies reporting their second-quarter results beat the low expectations of Wall Street analysts, and showed that their deep cost-cutting could overcome the continuing dizzying drop-off in advertising revenue -- down about 30% from the 2008 second quarter for every publisher that's reported so far. Optimism about newspapers was further stoked as CEOs told analysts that the advertising decline seemed to slow through the quarter.

There's no doubt that that explanation accounts for much of the rally, but not all of it.

Short sellers, those investors who profit when a stock price declines, could be called the unsung heroes of this rally.

Short sellers borrow shares and sell them, hoping the share price goes down so that when they buy shares to return them they can pocket the difference. But if the share price increases, "shorts" must quickly buy shares before they take big losses. Their efforts can run prices up rapidly.

It's called "short-covering," and it's the first explanation that occurred to Morningstar equity analyst Tom Corbett when newspaper stocks started soaring on July 15. That's the day Gannett reported a second-quarter profit that surprised analysts expecting a loss.

"I would attribute a good portion of the recent rally to what they call a 'short squeeze,'" he said Wednesday.

It's pretty clear that short sellers have dumped a fair amount of newspaper stocks -- but there is also evidence that much of the market thinks newspaper stocks are going to fall right back down.

On May 15, exactly two months before the start of the rally, as it happened, my colleague Jennifer Saba and I ran a list of the so-called "short interest" in newspaper stocks' for E&P's business-oriented blog "Fitz & Jen Give You The Business." What we found was that even though newspaper share prices were at rock bottom, they were being "shorted" at very high levels. …

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